FOREX-Lower U.S. yields hurts dollar; euro struggles

Fri May 16, 2014 7:27am EDT

* Euro on the back foot as euro zone periphery back on the radar

* Drop in benchmark U.S. yields seen undermining dollar

* Dollar near Thursday's 2-month low vs yen (Updates prices, adds comments)

By Anirban Nag

LONDON, May 16 (Reuters) - The dollar extended losses against the yen on Friday, trading near two month lows and putting it on course for its biggest weekly losses since early April as softer U.S. Treasury yields undermined the greenback.

Benchmark U.S. 10-year Treasury yields fell to a six-month low of 2.473 percent on Thursday. The yield climbed to around 2.50 percent but was well below the 2.67 percent levels seen earlier this week.

As a result, the dollar traded at 101.385 yen, close to a two-month low of 101.31 yen set on Thursday, with some Asian central banks cited as sellers. Support for the dollar lies at 101.20 yen, close to some intraday lows touched in March and the dollar's 200-day moving average.

"Dollar/yen sits right at the bottom of its three-month range, with lower U.S. yields, weaker global equities, and an underperforming Nikkei forming a powerful combination," said Adam Cole, head of G10 currency strategy at RBC Capital Markets.

European stocks were in the red, while Japanese shares , with which the yen has an inverse correlation, posted their third weekly loss in the past month. The yen usually gains when riskier assets lose.

The spotlight turns to U.S. data with focus on the University of Michigan gauge of consumer confidence for May. Forecasts are for a reading of 84.5, which would be the strongest outcome in ten months. That apart, housing starts and building permits for April are also due at 1230 GMT.

Analysts said the dollar could come under renewed pressure versus the yen if the U.S. 10-year yield falls further, after its breach of a recent trading range.

The drop in U.S. yields on Thursday caught some by surprise. Traders pointed to funds moving to safety after a sell-off in Greek bonds halted a rally in peripheral euro zone debt.

EURO SLIPS, EYES PERIPHERY

The sell-off in the periphery's bonds, if it gathered pace, was likely to hurt the euro, traders said.

The euro fell 0.1 percent to trade at $1.3695, having fallen as far as $1.3648 on Thursday, its lowest since late February. Against the yen, the euro was down 0.3 percent at 138.85 yen, having fallen to 138.77 yen, its lowest in three months.

"The recent softer tone in peripheral stocks and bonds suggests that the rallies in these assets has become tired and this could be pre-empt a less robust tone for the euro in the week ahead," said Jane Foley, senior currency strategist at Rabobank.

The euro was down about 0.5 percent for the week against the dollar, putting it on track for its second straight weekly decline. Indeed, the euro has fallen 2.2 percent since May 8 when European Central Bank President Mario Draghi told markets the bank was ready to provide new stimulus next month.

The disappointing growth figures on Thursday heightened those expectations and some investors are betting that the euro could grind lower in coming weeks.

Reflecting this, the implied one-month volatility in the euro/dollar, the expected price swings over the coming month, has picked up this week from 7-year lows, to trade at 5.8 percent on Friday. (Editing by Larry King)

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