July 10, 2017 / 7:37 AM / a month ago

FOREX-Dollar at 2-month highs vs yen on policy divergence

* Non-farm payrolls report shows bigger-than-expected job increase

* BOJ's Kuroda reiterates policy stance

* Spread between U.S. and Japanese bond yields diverge

By Saikat Chatterjee

LONDON, July 10 (Reuters) - The dollar climbed to a two-month high against the Japanese yen on Monday as robust jobs data propped up U.S. Treasury yields, although investors were wary of adding big positions before Federal Reserve chief Janet Yellen's testimony this week.

The yen came within touching distance of a four-month low against the dollar in early London trade, with investors adding to bets that play on the divergence between rising Western government bond yields and low Japanese equivalents.

"Dovish expectations regarding the BoJ's policy, combined with the U.S. yields are supportive of a further yen depreciation against the U.S. dollar," said Ipek Ozkardeskaya, a senior market analyst at London Capital Group who expects dollar bulls to target 115 yen in the weeks to come.

U.S. job growth surged more than expected in June and employers increased hours for workers, signs of labor market strength that could keep the Fed on course for a third interest rate hike this year despite sluggish wage gains.

Bond yields have also diverged in recent weeks, helping "carry trades" that borrow cheaply in one currency to buy in another with higher interest rates.

The spread between 10-year U.S. Treasury yields and its Japanese counterpart traded at its widest in two months.

"Carry trades are back in vogue and that can be seen in the yen's price action this morning but we should see some consolidation before Yellen's testimony this week," said Sue Trinh, head of Asia FX strategy at Royal Bank of Canada in Hong Kong.

Janet Yellen's semi-annual testimony is the key highlight of this week for market watchers where she may hold out the possibility of another Fed rate hike before the end of the year.

Against the dollar, the yen traded at a two-month low of 114.30 in early trades.

The yen's weakness was also noticeable on the crosses as the the Bank of Japan reiterated its stimulus plans on Monday after the central bank showed its determination last week to defend its commitment to keep the 10-year yield around zero percent.

On Monday, Bank of Japan Governor Haruhiko Kuroda reiterated the central bank's resolve to maintain its massive stimulus programme until inflation is stably above its 2 percent target.

Against the euro, the yen was trading at 130.33 its weakest since Feb. 8, 2016. The Australian dollar was also strong against the yen. (Additional reporting by Lisa Twaronite in TOKYO; Editing by Keith Weir)

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