By Alun John

HONG KONG (Reuters) – The yen edged higher ahead of the outcome of a central bank policy meeting on Tuesday, while the dollar seemingly shrugged off U.S. Treasury yields hitting new near two-year highs on their return from a long weekend.

The Bank of Japan will likely revise its inflation forecast up slightly in a quarterly outlook report after the meeting, due to rising energy costs, Reuters reported last week citing sources, although the new projection is still below the BOJ’s 2% target.

The meeting should end at the end of the morning in Tokyo.

The dollar slipped as much as 0.15% against the yen in early trading at 114.43 yen to the dollar, and also weakened slightly against the pound and the euro.

Dollar weakness came even as US Treasury yields continued to gain, with the short end of the curve hitting new pandemic highs, which would normally be supportive for the greenback.

Two-year yields topped 1% for the first time since February 2020 at the Asian open, as trading resumed after a U.S. holiday, and five-year yields rose 3.6 points base at 1.5960%, the highest since January 2020. [US/]

Yields have risen this year as traders expect the Federal Reserve to start raising interest rates as early as March, but the dollar index, which measures the greenback against six peers, lost 0 .52% since the start of the year.

“The conundrum everyone is grappling with is either the dollar is a screaming buy relative to yields or there’s a lot of supportive dollar news priced in,” said Ray Attrill, chief strategy officer. FX at National Australia Bank.

He said anomaly theories include investors reacting early to the fact that the dollar historically peaked when the Fed raised rates, or trading in anticipation of increased global economic growth. But he said he was not convinced by either argument.

The euro topped at $1.1416, while the pound was flat at $1.3657, after an early rally in the two currencies at the start of the year fizzled out at the end of the week. last.

As the pound was boosted by the Bank of England’s aggressive tightening expectations, ING analysts said they believed any weakness due to political uncertainty in Britain, where Prime Minister Boris Johnson faces calls for the resignation, would be contained.

There are no major economic data for the euro zone on the calendar this week, but investors will focus on speeches by European Central Bank President Christine Lagarde, other ECB members and the minutes from the central bank’s December policy meeting on Thursday.

The Australian Dollar (AUD=D3> remained stable at $0.722.

Bitcoin was in the doldrums at $42,353, having trended lower since hitting its all-time high of $69,000 in November.

(Reporting by Alun John; Editing by Kim Coghill and Jacqueline Wong)