FOREX-Dollar struggles as U.S. 10-yr yields hold near two-year high
* Dollar supported by rise in U.S. yields * Expectations of Fed tapering lead to dollar bids * ECB's monetary policy seen remaining accommodative NEW YORK, Aug 16 (Reuters) - The dollar fell against the euro and traded little changed against the yen on Friday, as investors adjusted positions amid a rise in U.S. Treasury yields on expectations that the Federal Reserve may start withdrawing stimulus as soon as next month. While a cutback in stimulus is not a rise in official interest rates, investors are acting as if the rise in Treasury market yields is the equivalent. Rising U.S. yields would typically raise the attractiveness of dollar-denominated assets and be good for the dollar. But coming on the back of a major policy shift from the Federal Reserve, quantitative easing or bond purchases by the Federal Reserve for its own balance sheet was uncharted territory, and investors are concerned that rising yields may lead to a sell off in U.S. assets. Treasury Department data on Thursday showed China and Japan led an exodus from U.S. Treasuries in June after the first signals the U.S. central bank was preparing to wind back its stimulus. [ID:nL2N0GG0LC} The sales were part of $66.9 billion of net sales by foreigners of long-term U.S. securities in June, a fifth straight month of outflows and the largest since August 2007, U.S. Treasury Department data showed on Thursday. "Yesterday's data spooked investors into concern about a wholesale abandonment of U.S. assets," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington. "If Treasury prices continue to fall, potential tapering may not be as broadly positive for the dollar as first thought. Ultimately rising bond yields will support the dollar but not against such a big change in the backdrop." Ten-year Treasury yields traded near two-year peaks, while the gap between two-year Treasury yields and their Japanese counterpart rose to its highest in six weeks, Reuters data showed. U.S. housing starts and permits for future home construction rose less than expected in July, suggesting that higher mortgage rates could be slowing the housing market's momentum. But the data did nothing to help or hinder the dollar after an initial kneejerk reaction. The dollar index fell 0.1 percent to 81.123. The euro was slightly higher on the day at $1.3361, while against the yen, the dollar was flat on the day at 97.30. Part of the reason for yen bids was because a drop in global stock markets underpinned demand for the safe-haven currency, traders said. Still, with the Fed set to become the first major central bank to start withdrawing stimulus, the dollar is likely to trade with a firm bias, analysts said. "Given that the 10-year U.S. yields are headed towards 3 percent we think the general direction is for a stronger dollar," said Tom Levinson, FX strategist at ING. "The dollar index has underperformed the rise in yields so there is a fair bit of catch-up to do." The Bank of Japan embarked on a massive quantitative easing program in April, and with more fiscal and structural reforms likely to be put in place in coming months, more Japanese investors are looking overseas for higher yields. And even though the euro zone has emerged from a recession, the European Central Bank looks unlikely to change its accommodative policy stance any time soon. In the United States, though, reasonably sturdy domestic data has bolstered expectations that monetary policy may not remain ultra-loose for long. "We remain constructive of the dollar and expect Fed to start tapering in the near term," said Kenneth Dickson, investment director at Standard Life Investments in Edinburgh, which has $271 billion of assets under management.
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