FOREX-Euro lifted by Bundesbank; US yield rise limits dollar losses
* Bundesbank comments help euro * U.S. Treasury yields help dollar contain losses vs euro * Fed minutes on Wednesday to shed light on U.S. tapering plans * Dollar index stays above recent near two-month low By Gertrude Chavez-Dreyfuss NEW YORK, Aug 19 (Reuters) - The euro rose to a two-week high against the yen and edged higher versus the dollar on Monday, boosted by comments from the Bundesbank which suggested that the European Central Bank's low interest rate pledge last month was not set in stone and would depend on the medium-term outlook for inflation. In its August monthly report, the Bundesbank said the ECB's forward guidance on low interest rates was "not an unconditional commitment". The ECB in July committed to keep interest rates at record lows for an "extended period". The Bundesbank's statement pushed the euro to the day's highs against the dollar at $1.3374. The German central bank was also optimistic about Germany's growth. The country's expansion in the second quarter -- when it grew at its fastest pace in more than a year -- likely returned the economy to a more normal growth path, the Bundesbank said. . The euro's gains, however, were limited by the rise in U.S. 10-year Treasury yields on Monday, which advanced to 2.90 percent, their highest in two years. Investors looked ahead to Wednesday's release of the Federal Reserve's minutes of the July meeting, which could strengthen the view that the U.S. central bank could soon taper its bond-buying program. "We've seen the Bundesbank comments support the euro earlier in London, although it has come off since this morning due to the back-up in Treasury yields," said Brian Kim, currency strategist, at RBS Securities in Stamford, Connecticut. In early afternoon trading, the euro rose 0.1 percent to $1.3314, within sight of the $1.3400 level it touched on Aug. 8, the highest since June 19, according to Reuters data. Against the yen, the euro rose 0.3 percent to 130.37 yen . It hit a peak of 131.03 yen, the euro's highest since August 5. Andres Bergero, vice president and chief corporate trader at Bank of the West in San Ramon, California, said the Bundesbank is known to be hawkish when compared to other central banks in the euro zone. But he noted that the euro rallied "possibly because of a change of perception of the Bundesbank's stance." Inflation in the euro zone was last reported at 1.6 percent in June, well below the ECB's 2 percent inflation target and above the ECB's forecast of 1.4 percent in 2013. Bergero said the euro's mid-June high of $1.3414 may provide resistance for euro/dollar, and support is seen at around $1.3180. Investors have also started to focus on the Fed's minutes from its July 30-31 meeting, to be published on Wednesday. The minutes could fuel expectations that the Fed will start reducing its $85-billion per month bond purchase program. Such a move could further boost U.S. Treasury yields, enhancing the attractiveness of dollar-denominated assets. "It could just reinforce the view that the Fed is prepared to begin tapering sooner rather than later," said Eric Viloria, currency strategist at Forex.com in New York. "If the Fed does start to taper and other central banks remain accommodative and may even pursue more easing, that is going to be a positive for the U.S. dollar," he said. Uncertainty about the U.S. monetary policy outlook has pressured the dollar in recent weeks, driving it to a near two-month low. The dollar index was little changed on Monday, at 81.2201, still above a low of 80.868 plumbed on Aug. 8. Expectations of a scaling back of Fed stimulus have driven U.S. benchmark yields to two-year highs. But the impact on the dollar has been offset by the improving euro zone and UK economies, which have underpinned the euro and sterling. Analysts said euro zone manufacturing and services activity data due on Thursday could help the euro. The latest data from the Commodity Futures Trading Commission showed that currency speculators were bullish on the euro for the second straight week which ended on Aug. 13. Against the yen, the dollar edged up 0.2 percent to 97.68 yen. Chartists said if the dollar breaks above the Aug. 15 peak of 98.64 yen, it could retest the August high of 99.94 yen. While U.S Treasury yields have risen more than 10 basis points from last Friday's low to Monday's high, Japan government bond (JGB) yields have inched up by only around 2.0 basis points. As a result, the U.S.-Japan bond spread "continues to widen in favor of dollar/yen upside," strategists at UBS said.
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