3 Min Read
* 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 (Reuters) - 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 their decline.
The dollar pared earlier modest losses against the Japanese yen and euro after a stronger-than-expected report on U.S. housing construction.
"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," Franulovich said.
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)