FOREX-Euro slips, dented by ECB easing and yield gap vs dollar

Tue Jun 10, 2014 11:20pm EDT

Related Topics

* Euro approaches last week's 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

* Euro falls on crosses, hits a near 7-month low vs Aussie (Updates prices, adds comments)

By Masayuki Kitano

TOKYO, June 11 (Reuters) - The euro neared 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 has supported the greenback and put pressure on the single currency this week.

The euro fell 0.2 percent to $1.3525, 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.

"I think there is a true sentiment change going on  I think the actual sentiment is for a lower euro now," said Jesper Bargmann, head of trading for Nordea Bank in Singapore.

While the euro zone's current account surplus and deleveraging by European financial institutions could lead to some demand for the euro, the single currency seems likely to head lower, Bargmann said.

"I think it will be a preferred funding currency in the medium term, so I do think we're in a broader downtrend now. I particularly like the short euro against some of the higher-yielding currencies, so the Aussie and the kiwi," he added.

The euro set a near seven-month low against the Australian dollar on Wednesday. It was last down 0.2 percent at A$1.4421 , having touched its lowest level since November at one point.

Against the New Zealand dollar, the euro last fetched NZ$1.5834, having shed 1.3 percent so far this week.

With the euro in retreat, the U.S. dollar edged higher versus a basket of major currencies, rising 0.1 percent to 80.874.

FOCUS ON YIELDS

"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 versus the greenback 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, said Mizuho Bank's Karakama.

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

Although the single currency has fallen by about 1.6 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 ECB steps announced last week have been seen as being partly aimed at taming upward pressure on the euro, the strength of which can import disinflation.

The euro fell 0.2 percent versus the yen to 138.35 yen , while the dollar eased 0.1 percent to 102.29 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 & Kim Coghill)

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