FOREX-Dollar tumbles to 3-1/2-month low vs yen as yields fall

Mon May 19, 2014 10:29am EDT

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(Updates prices, adds comment, changes byline, dateline;
previous LONDON)
    * Dollar/yen most sensitive to U.S. yields
    * Euro steadies after two weeks of declines
    * Euro zone PMI data in focus this week
    * Fed meeting minutes, China PMI, Japan trade data also
awaited

    By Gertrude Chavez-Dreyfuss
    NEW YORK, May 19 (Reuters) - The dollar fell to its lowest
in more than three months against the yen on Monday, pressured
by a drop in U.S. Treasury yields that may be due to persistent
uncertainty about U.S. economic growth prospects.
    Mixed economic data and a generally dovish outlook from the
Federal Reserve have weighed on U.S. bond yields, consequently
tempering the dollar's ability to sustain meaningful gains this
year.
    "U.S. yields are still the main story," said Vassili
Serebriakov, currency strategist, at BNP Paribas in New York.
"The general feeling seems to be that the market is still
vulnerable to the downside in terms of yields."
    The dollar/yen pair is the most vulnerable to movements in
U.S. yields because it is where the market holds the largest
long positions on the greenback.
    Benchmark U.S. 10-year yields fell to 2.51
percent on Monday from 2.52 percent late on Friday. Yields have
fallen in four of the last five sessions and last Thursday, they
tumbled to six-month lows.
    The dollar fell as low as 101.11 yen, the weakest
since early February. It was last at 101.18, down 0.3 percent.
The greenback's break below 101.20 yen was the first time since
November that it has traded lower than its 200-day moving
average, which was at 101.17 yen. 
    It has been a choppy period for currency markets, hamstrung
this year by a lack of clear differentiation between the
economic stories of Japan, Europe and the United States. 
    Growth is now moving at different rates, although official
borrowing costs in all three remain near rock bottom. Signs the
European Central Bank is preparing to loosen monetary conditions
even further knocked the euro back last week. 
    The single currency gained 0.2 percent on Monday to $1.3720
 after a volatile session on Friday. 
    BNP's Serebriakov said the euro's strength was just a result
of the dollar's broad weakness. "I don't think anybody wants to
buy the euro at this point."
    Analysts from Credit Agricole said the euro's resistance to
further losses at the end of last week raised prospects it may
head higher. 
    "This week's focus will be on PMI releases, which we expect
to confirm a trend of further improving growth conditions," they
said in a morning note. 
    "Under such conditions, position squaring-related EUR upside
cannot be excluded. We advise against selling the single
currency around the current levels. From a broader angle,
however, we expect rallies to remain a sell."
    The dollar index stood at 79.971, down slightly on
the day after notching up a modest 0.2 percent gain last week,
when it touched a six-week peak of 80.338 on Thursday.
    Investors also await minutes later this week of the Federal
Reserve's April 29-30 policy meeting, as well as a private
survey on China's manufacturing sector for May.
  

 (Additional reporting by Patrick Graham in London; Editing by
Chizu Nomiyama)
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