The dollar surged on Tuesday to a 20-year high against the Japanese yen, underpinned by the divergence in monetary policy between a Federal Reserve determined to keep a lid on soaring inflation and a Bank of Japan that has kept interest rates ultra-low.

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The greenback hit 128.97 yen, the highest since May 2002. It was last up 1.5% at 128.94 yen. The dollar has risen 5.9% on the yen so far this month, on pace for the largest monthly percentage rise since 2016.

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"The BOJ has done the opposite of normalization. They have dug their heels in," said Richard Benson, co-chief investment officer at Millennium Global Investments in London.

Benson believes Japanese monetary authorities could actually intervene to strengthen the yen, but it is not about a particular level.

"I wouldn`t be surprised if the BOJ intervenes because they have a lot of dollars and they can just sell them easily," Benson said. "There are obvious numbers to talk about and levels, but the narrative is very much about speed as opposed to level. So slow and gradual is fine."

Japanese Finance Minister Shunichi Suzuki made the most explicit warning against the yen`s recent slump on Tuesday, saying the damage to the economy from a weakening currency at present is greater than the benefits from it.

Morgan Stanley, in its latest research note, said the yen`s decline versus the dollar was justified amid Japan`s worsening terms of trade, with soaring raw materials driving up import costs, as well as contrasting inflation outlooks between the countries.

While Japan`s core consumer price index (CPI) data, to be released on Thursday, likely rose 0.8% in March from a year earlier, faster than a 0.6% gain in February, the level is still way below the BOJ`s long-held inflation target of 2%.

The dollar index, which measures the greenback against six other currencies, also climbed on Tuesday, rising past 101 for the first time in more than two years. It was last up 0.2% at 100.98.

Providing a dollar lift is the continued rise in U.S. yields. U.S. benchmark 10-year Treasury yields hit 2.93% on Tuesday, the highest since December 2018, while U.S. 10-year inflation-linked bond yields rose to -0.01%, on the cusp of turning positive for the first time in two years.

Chicago Federal Reserve Bank President Charles Evans, who is not a voter on this year`s Federal Open Market Committee, said on Tuesday he is "comfortable" with a round of rate hikes this year that includes two 50 basis-point increases and reaches a neutral setting by year end, but he does not see the need for bigger hikes.

Evans joins a chorus of Fed speakers who are pushing for front-loading the rate increases.

The greenback rose to 0.9519 francs versus the Swiss currency, the highest since June 2020. It last changed hands at 0.9513 francs, up 0.7%.

The euro recovered some ground, trading 0.1% higher against the dollar at $1.0791, but stayed just off last week`s two-year low of $1.0756.