Dollar takes breather from Fed-inspired rally

The dollar slipped in Asian trading on Monday, as investors locked in gains after its rise last week on growing expectations of a U.S. interest rate hike later this month.

Market participants also kept a wary eye on developments in North Korea, which fired four ballistic missiles early on Monday, three of which landed in Japan's exclusive economic zone. The news bolstered the perceived safe-haven yen, and also weighed on U.S. Treasury yields, decreasing the dollar's appeal.

"North Korea is unpredictable, but it fairly frequently conducts missile tests," said Kaneo Ogino, director at foreign exchange research firm Global-info Co in Tokyo.

"One difference now is that it is also hard to predict how President (Donald) Trump will respond to such tests," he said.

The dollar slipped 0.2 percent to 113.88 yen, down from Friday's high of 114.75.

The yield on benchmark 10-year U.S. Treasury notes slipped to 2.476 percent in Asian trading, from Friday's US close of 2.492 percent.

Federal Reserve Chair Janet Yellen said on Friday that the central bank is set to raise its benchmark interest rate later this month as long as economic data on jobs and inflation holds up, in comments that likely cement a rate hike at the Fed's next meeting on March 14-15.

In addition to Yellen, four other top U.S. central bank officials spoke at various times during the day.

Fed funds futures prices show traders see more than an 85 percent chance of a rate increase this month, up from just a one in three chance early last week, according to CME Group's Fed Watch tool.

Still, speculators reduced bullish bets on the U.S. dollar in the week ended Feb. 28, pushing net longs to their lowest since early October, according to Commodity Futures Trading Commission data released on Friday and calculations by Reuters. [IMM/FX]

"There has been some dollar adjustment back down today, after it rose throughout last week on the heightened expectations for a Fed rate increase," said Kumiko Ishikawa, FX market analyst at Sony Financial Holdings.

US political developments also weighed on the dollar. Trump on Saturday accused his predecessor Barack Obama of wiretapping him during the 2016 election campaign, an accusation rejected by Obama and a top former intelligence official.

The controversy distracts from policy issues on which investors are still waiting for details, said Masashi Murata, senior currency strategist at Brown Brothers Harriman.

"We need to take time until we can get more details about fiscal stimulus under Trump," since the US economy is unlikely to continue its pace of growth without stimulus, Murata said.