* Greenback holds above two-month low against yen
* Strong housing starts stem further U.S. yield drop
* Euro on the defensive on peripheral worries, bets on ECB
(Updates market action, adds graphic)
By Richard Leong
NEW YORK, May 16 The dollar held a slim gain
against a basket of major currencies on Friday as benchmark U.S.
Treasury yields edged up from their lowest levels in six months,
although the greenback faces further weakness if yields resume
The dollar pared earlier modest losses against the Japanese
yen and euro after a stronger-than-expected report on U.S.
"Falling yields have been problematic for the dollar," said
Richard Franulovich, senior currency strategist at Westpac
Banking Corp in New York. "Bond yields look too low here against
this economic backdrop."
The decline in the dollar and U.S. Treasuries yields came in
the face of encouraging domestic economic data in recent weeks.
On Friday, the government said housing starts rose 13.2 percent
to 1.07 million annualized units in April, the strongest level
since November 2013.
The bond market's rally has confounded analysts and traders
who reckoned it will eventually peter out and the dollar will
rebound from current levels.
Benchmark U.S. 10-year Treasury yields were last
at 2.518 percent, up from the six-month low of 2.473 percent on
Thursday. The 10-year yield is set to fall nearly 11 basis
points this week.
The dollar traded at 101.45 yen, above a two-month
low of 101.31 yen set on Thursday and its 200-day moving average
of 101.20 yen which analysts peg as a key support.
The greenback gained a touch against the euro, trading at
$1.3697 after falling to $1.3648 on Thursday, its lowest
since late February. It rose 0.4 percent on the week against the
euro, putting it on track for back-to-back weekly increases.
Against the yen, the euro slipped 0.2 percent at 138.96 yen
after a three-month low of 138.77 yen earlier.
Thursday's disappointing euro zone growth data raised
expectations the European Central Bank will embark on more
stimulus at its June policy meeting, and some investors are
betting that the euro could grind lower in coming weeks.
Traders also pointed to funds moving to safety after a
sell-off in Greek bonds halted a rally in debt of weaker euro
zone members. The sell-off in peripheral bonds, if it gathered
pace, was likely to hurt the euro, traders said.
The yield on 10-year Greek bonds edged up 2
basis points to 6.851 percent, its highest since late March.
"We have a lot of volatility in Europe especially the last
two days. I find it hard for the euro to rally from here,"
The implied one-month euro/dollar volatility, the
expected price swings over the coming month, has risen this week
from 7-year lows to 5.8 percent on Friday.
(Additional reporting by Anirban Nag in London; Masayuki Kitano
in Tokyo; Editing by Chizu Nomiyama and Richard Chang)