FOREX-Dollar rally pauses but robust outlook intact

Fri Jun 21, 2013 7:17am EDT

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By Anooja Debnath

LONDON, June 21 (Reuters) - The dollar retreated from a two-week high against a basket of major currencies on Friday but was still likely to clock its best weekly gains in a year on expectations of an eventual end to ultra-loose U.S. monetary policy.

After two straight days of sharp gains, some speculators booked profits on the dollar's rise. That helped the euro to recover from a two-week low struck on Thursday.

But the euro's gains looked shaky as interest rate differentials are moving in favour of the dollar. Also, a rise in bond yields in southern European countries, given a global bond market sell-off, is compounding the euro zone's problems.

The re-emergence of Greece's political turmoil on Friday is also keeping investors on edge and a worsening of the situation could trigger a slide in the single currency.

The dollar rallied and assets like stocks and bonds fell on Wednesday after Federal Reserve Chairman Ben Bernanke said the economy was improving enough for the central bank to begin scaling back its monthly $85 billion in asset purchases.

Against the currency basket the dollar stood at 81.816 , below Thursday's two-week high of 82.145, though it was still up 1.4 percent for the week.

"I see a continuation of the trend of a stronger dollar. An improved set of U.S. macro fundamentals and likely tapering (by the Fed) by the end of the year will benefit it," said Neil Jones, head of hedge fund FX sales at Mizuho Corporate Bank.

Analysts said expectations of the Fed slowing the pace of its stimulus led to confusion over where investors ought to store their assets and this will also likely help the dollar.

"Players will likely park (assets) in the dollar until we have got a little more clarity about where the world is going ... dollar is benefiting from that and I sense it will continue to do so," Jones said.

Against the dollar, the euro was steady at $1.3222, but well below Wednesday's four-month peak of around $1.3418.

Traders said with the yield gap between 10-year Treasuries and German Bunds rising to its highest since late April 2010 in favour of the former, most investors were looking to initiate fresh bets against the euro.

The last time spreads between U.S. Treasures and benchmark German Bunds were at that level over three years back, the euro started to fall from a high of above $1.34 to below $1.20.

The dollar gained 0.3 percent against the yen to 97.55 yen , still near its 98.29 yen top hit on Thursday.

"Among G-10 currencies, we see the dollar as the most popular," said Yujiro Goto, FX strategist at Nomura. "Demand from Japanese investors for Treasuries will pick up and we are expecting the U.S. economy to keep growing. The Fed is likely to start tapering (stimulus measures) in September and this is very encouraging for dollar/yen."

There are concerns, however, that higher U.S. interest rates could prompt a stampede out of emerging markets. Such a development could favour traditional safe-haven currencies such as the yen and the Swiss franc, traders said.

Yields on 10-year U.S. Treasuries rose to their highest since August 2011 after Bernanke's comments on Wednesday.

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