FOREX-Dollar firm on US recovery hopes, hits 5-year high vs yen

Wed Dec 25, 2013 11:46pm EST

* Dollar/yen hits 5-year high on monetary policy contrast

* Dollar pares some gains after Japan PM's war shrine visit

* 10-year US notes yield near 3 pct, supporting dollar

* Rise in US yields seen as risk to emerging markets, shares

By Hideyuki Sano

TOKYO, Dec 26 (Reuters) - The dollar hit a five-year high against the yen on Thursday and held firm against other currencies on expectations the U.S. economy will continue a solid recovery, allowing the Federal Reserve to gradually withdraw its stimulus next year.

The greenback rose as high as 104.85 yen, surpassing last week's high of 104.64 yen. It last stood at 104.75 yen, up 0.5 percent on the day.

The dollar gave back some of the gains following news that Japanese Prime Minister Shinzo Abe visited the controversial Yasukuni Shrine for the war dead, a move that could worsen strained Sino-Japanese relations and hurt investors' risk appetite.

Option-related offers at 105 yen are seen as a major hurdle for the dollar to advance further and some traders suspect this resistance level may not be broken until next month, when more market participants will have returned from year-end holidays.

Most financial centres in Europe and the Americas were closed for Christmas on Wednesday, with many shut on Thursday as well.

Yen-selling could be a favourite trade among investors next year because they expect the Bank of Japan to maintain, or even enhance, its ultra-easy policy to conquer deflation.

That contrasts with the Fed's move last week to begin reducing its stimulus, although it has said it still intends to keep interest rates low for a long time.

"Initially the Fed appears to have succeeded in curtailing rate hike expectations. But U.S. bond yields have risen since then, and we need to keep an eye on them for implications on risk asset prices," said Junya Tanase, chief FX strategist at JPMorgan Chase in Tokyo.

The yield on 10-year U.S. notes rose to around 3.0 percent on Thursday, near the two-year peak of 3.007 percent hit in September.

Rising U.S. yields are generally positive for the dollar because they are likely to encourage investors to buy more dollar bonds.

Higher U.S. bond yields could also destabilise risk assets, particularly those in emerging markets. That could prompt investors to buy "safer" currencies, including the dollar.

The dollar index, which tracks the greenback against a basket of major rivals, stood at 80.589 , up slightly on the day and not far from last week's high of 80.827.

The euro was little changed at $1.3672, some way off last week's high of $1.3812, though the single currency has been on solid ground on the whole in the last several weeks.

The euro also hit a five-year high of 143.36 yen, rising from 142.79 yen on Wednesday.

While the euro zone's recovery is seen as sluggish, the currency has been underpinned by European banks' repatriation as well as buying by euro zone exporters as the euro zone's current account surplus has increased sharply.

The Australian dollar slipped 0.5 percent against a broadly supported U.S. dollar to $0.8885, edging near three-year low of $0.8860 hit last week.

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