* Dollar close to nearly 2-month highs vs yen
* Lower U.S. yields keep dollar’s upside capped
* Markets ponder likelihood of Fed hike in wake of China move
By Lisa Twaronite
TOKYO, Aug 12 (Reuters) - The dollar began Wednesday’s trading not far from a two-month peak against the yen scaled after the Chinese central bank surprised markets by devaluing its yuan by almost 2 percent.
A key question for investors is how the People’s Bank of China’s unexpected move might affect the timing of the U.S. Federal Reserve’s long-awaited increase to interest rates, which many believe could still come as early as next month, in light of improving U.S. economic data.
“While the move by the PBOC highlights the risks to the U.S. outlook, we retain our call for a September hike, but believe the probability has fallen somewhat, as the move may raise FOMC concerns about global growth and inflation pressures,” strategists at Barclays said.
Data released on Tuesday showed U.S. nonfarm productivity rebounded in the second quarter, but a weak underlying trend suggested inflation could pick up more quickly than economists thought.
U.S. Treasury yields tumbled, keeping the dollar’s gains in check, with the benchmark 10-year note yield at 2.149 percent in early Asian trading, compared to its U.S. close of 2.139 percent.
Against the yen, the dollar was nearly flat at 125.07 after rising as high as 125.21 yen overnight, its highest since early June.
The perceived safe-haven Japanese currency was buying 138.13 against the euro, which rose as high as 138.36 yen, its highest level since June 26. The euro was also steady at $1.1042, not far from a nearly two-week high of $1.1089 touched on Tuesday.
China’s central bank set its official guidance rate nearly 2 percent lower on Tuesday at 6.2298 yuan per dollar - its lowest point in almost three years. It said the move was aimed at making its foreign exchange system more responsive to market forces.
“There could be some jitters on the CNY fixing today,” Sean Callow, senior currency strategist at Westpac, said in a note. “Under the new system, the starting point for today’s fixing should be the USD/CNY 6.3250 close. This would be 1.5 percent above yesterday’s 6.2298.”
A higher fixing could be justified by overnight dollar price action, but it might spark renewed selling of the Australian and New Zealand dollars, as well as Asian currencies.
The Aussie, widely considered a proxy for China plays, was up about 0.2 percent in early trading at $0.7314, after logging a sharp fall of around 1 percent in the wake of China’s yuan move on Tuesday.
Markets will also monitor Chinese data to be released later in the session, to gauge the strength of industrial production and fixed asset investment. (Editing by Eric Meijer)