Hong Kong (AFP) - The yen extended gains Tuesday, putting it in range of a 2026 high against the dollar as investors ramp up bets on Bank of Japan interest rate hikes, though equities dropped as oil prices rallied.

The Japanese unit has enjoyed a much-needed rally over the past week amid expectations the central bank will speed up its pace of monetary tightening in the face of surging inflation.

With some observers even predicting back-to-back hikes, the yen has climbed more than four percent against the greenback, with Monday’s gains said to be helped by thin liquidity as US markets were closed for a holiday.

A historic joint intervention by authorities in Japan and the United States at the end of July sent the currency surging from a four-decade low of almost 164 per dollar but began weakening until last week, when traders began snapping it up again.

On Tuesday it briefly hit 152.89 and within distance of the 152.10 touched in February, its highest this year.

While a BoJ hike is widely expected, investors will be keeping a close eye on US consumer price data on Friday, which could be the deciding factor in the Federal Reserve decision-making on its own rates.

Blockbuster US jobs figures last week have pushed up bets on a Fed increase – the CME Group’s FedWatch tool factoring a more than 60 percent chance of such a move.

A spike in oil prices – stoked by a recent flare-up in the Middle East crisis – is adding to pressure on the US central bank, with average diesel prices in the United States hitting a record high Monday, according to the motorists’ association AAA.

Both main crude contracts jumped Tuesday, with Brent up more than two percent and heading towards $100 a barrel while West Texas climbed more than three percent.

Fresh attacks by Yemen’s Iran-backed Houthi rebels on Saudi Arabia led to the halting of operations at several energy facilities in the kingdom, overshadowing Tehran’s remarks that it was nearing a deal with Oman over shipping through the Strait of Hormuz.

“The market is staring down a Fed hike, a live inflation debate, oil near triple digits, the risk of further Japanese tightening, possible capital repatriation back to Japan, renewed tariff threats against Canada,” said Stephen Innes at Quintex Intel.

On the consumer price index, he added: “A soft print keeps the story manageable: resilient growth, sticky but cooling inflation, and a Fed that can still afford to wait.

“A hotter print lands very differently because oil is now moving in the wrong direction at exactly the wrong moment.”

The prospect of higher US rates and the spiked in crude costs was also weighing on equity sentiment, with tech firms reversing after a positive morning.

Seoul ended lower, having cruised more than two percent higher earlier on the back of chipmakers SK hynix and Samsung.

Tokyo, Hong Kong, Sydney, Singapore, Taipei, Wellington, Mumbai and Bangkok all fell, though there were gains in Shanghai, Manila and Jakarta.

London, Paris and Frankfurt were also in the red.

Investors are looking ahead to earnings from tech titan Oracle on Thursday, which will be scoured for a fresh idea about the outlook for the AI boom.

- Key figures at around 0810 GMT -

West Texas Intermediate: UP 3.1 percent at $94.31 per barrel

Brent North Sea Crude: UP 2.2 percent at $99.15 per barrel

Tokyo - Nikkei 225: DOWN 1.7 percent at 66,269.33 (close)

Hong Kong - Hang Seng Index: DOWN 0.4 percent at 25,317.18 (close)

Shanghai - Composite: UP 0.2 percent at 3,940.55 (close)

London - FTSE 100: DOWN 0.2 percent at 10,803.09

Dollar/yen: DOWN at 153.80 yen from 154.24 yen on Monday

Euro/dollar: DOWN at $1.1614 from $1.1632

Pound/dollar: DOWN at $1.3533 from $1.3544

Euro/pound: DOWN at 85.81 pence from 85.90 pence

New York - Dow: Closed for a public holiday