FOREX-Euro slips, hit by widening yield gap on U.S. dollar

Tue Jun 10, 2014 8:33pm EDT

Related Topics

* Euro hovers within sight of 4-month low vs dollar

* Dollar supported by rise in U.S. bond yields

* U.S.-euro zone yield gap widens in dollar's favour

By Masayuki Kitano

TOKYO, June 11 (Reuters) - The euro languished near a four-month low on Wednesday, after the dollar's yield advantage over the single currency widened in the wake of upbeat U.S. economic data and the European Central Bank's monetary easing.

A rise in U.S. bond yields on speculation that the U.S. Federal Reserve could raise interest rates sooner than previously expected helped support the greenback this week.

The euro eased 0.1 percent on the day to $1.3529, nearing a four-month low of $1.3503 set last Thursday shortly after the ECB cut interest rates to record lows and took its deposit rate into negative territory for the first time.

"The only theme is a widening in U.S.-European yield differentials," said Daisuke Karakama, chief market economist for Mizuho Bank in Tokyo, referring to the driver of the euro's declines over the past couple of days.

According to Thomson Reuters data, the yield spread between two-year U.S. Treasury yields and two-year German government bond yields has risen to more than 37 basis points this week, the fattest in seven years.

A strong U.S. jobs report on Friday, and hawkish comments from St. Louis Federal Reserve bank president James Bullard on Monday has given a lift to U.S. bond yields this week and has helped buoy the greenback against the euro.

Even if the euro were to fall in the near term, it remains to be seen whether such weakness will be sustained, Karakama said.

"I think there could eventually be a return to undesired strength in the currency," he said.

Although the single currency has fallen about 1.5 percent versus the dollar this year, market players have been surprised by its resilience, which has been attributed to factors such as the euro zone's current account surplus as well as inflows and repatriation into euro zone assets.

The dollar index, which measures the greenback's value against a basket of major currencies, last stood at 80.870 . The dollar index had touched a four-month peak of 81.02 last Thursday.

Against the yen, the dollar held steady at 102.38 yen . A focal point for the yen this week is the Bank of Japan's two-day policy meeting on June 12-13.

The BOJ is seen likely to keep monetary policy steady at its policy decision due on Friday and may slightly revise up its assessment on overseas growth, signalling confidence that the economy is on course to meet its inflation target next year without additional stimulus. (Editing by Eric Meijer)

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