By Kevin Buckland
OTTAWA, Aug 8 (Reuters) - The dollar firmed slightly against the yen on Monday, building on the strong gains made at the of last week after surprisingly strong U.S. jobs data lifted expectations for more aggressive Federal Reserve policy tightening.
The greenback was last 0.1% higher at 135.155 yen, and earlier rose to 135.585 yen, its highest since July 28, after surging 1.57% in the previous session for its biggest single-day gain since June 17.
The dollar index, which measures the currency against six counterparts, stood at 106.54, not far off from a Friday peak of 106.93, also the strongest since July 28.
Traders currently see a 70.5% probability the Fed continues the pace of 75 basis-point interest-rate increases for its next policy decision on Sept. 21, from about 41% before the strong payrolls data on Friday raised worries that wage growth would fuel inflationary pressures.
The focus this week will be on the U.S. consumer price index due Wednesday, and whether it can cement the odds for super-sized rate rises. Analysts polled by Reuters expect annual inflation eased to 8.7% in July from 9.1% previously.
"It will likely take a number below 8.4% to get the odds of a 50bp hike in September as the default setting," although that "seems unlikely," Chris Weston, head of research at Pepperstone, wrote in a note.
"I wouldn't want to be short USDs if the CPI print comes in above 9%."
The two-year Treasury yield eased slightly to 3.2136% in Tokyo trading on Monday, after reaching 3.3310% at the end of last week, a level not seen since mid-June.
The 10-year yield stood at 2.8140%, marginally down from a two-week high of 2.8690% touched Friday.
However, the negative spread between the two- and 10-year yields remained a good 40 basis points, having hit 45 basis points on Friday, the most since August 2000. An inverted yield curve is widely interpreted as a pre-cursor to a recession.
"At this time confidence in the growth outlook is much more important. On a two-to-three year view, the U.S. is increasingly at risk of stagnation given weak consumption and investment," said Elliot Clarke, senior economist at Westpac.
Elsewhere, the euro sank 0.15% to $1.01815 while sterling was largely unchanged at $1.2077.
The British pound dropped as low as $1.2004 on Friday, a day after the Bank of England raised interest rates by half a point, as expected, while warning of a protracted downturn.
"The Bank of England's forecast of recession underpins the vulnerability of the pound going forward," Rabobank senior FX strategist Jane Foley wrote in a note, predicting sterling could dip to $1.14 within three months.
Meanwhile, the Australian dollar bounced to $0.6927, recovering slightly after a 0.8% fall on Friday, while the New Zealand dollar was flat at $0.62435.
(Reporting by Kevin Buckland; Editing by Sam Holmes & Simon Cameron-Moore)