* Prospect of Fed stimulus winding down boosts dollar
* Euro holds above chart support after German Ifo
* China worries push Australian dollar to 33-month low
By Gertrude Chavez-Dreyfuss and Nick Olivari
NEW YORK June 24 The U.S. dollar on Monday
rallied to its highest in nearly three weeks against a basket of
currencies on rising expectations U.S. monetary stimulus will be
scaled back in the near term.
The shift in sentiment has prompted investors to unwind bets
that the Federal Reserve was not ready to end its bond-buying
program, known as quantitative easing. The unwinding, however,
could take months.
The dollar has gained across all major currencies since Fed
Chairman Ben Bernanke said last Wednesday that the U.S. central
bank could taper its monthly $85 billion in asset purchases if
the economy continues to improve. U.S. bonds and stocks have
sold off since the Fed announcement.
"The optimism by the Fed fell in sharp contrast to other
prominent central banks, such as the Bank of Japan, Bank of
England, European Central Bank, and Reserve Bank of Australia,
which are seeking measures to thwart a further economic slowdown
to their respective jurisdictions," said Ravi Bharadwaj, market
analyst at Western Union Business Solutions in Washington.
In late trading, the dollar index was up 0.1 percent
at 82.405 after rising as far as 82.841, its highest since June
5. The gains added to last week's 2.2 percent rally, its biggest
weekly rise since November 2011.
Bernanke's comments have helped push up the benchmark
10-year U.S. Treasury note's yield to its highest in
almost two years on Monday with interest rate differentials
moving in favor of the dollar. U.S. 10-year
yields were at 2.568 percent in late afternoon trading.
The dollar came off their highs, however, after the Dallas
Fed President Richard Fisher said on Monday an exit from
monetary easing "is way out in the future."
"Given stretched valuations of depreciated risk currencies,
buying the dollar, yen, and Swiss franc - the safe havens -
against them at current levels could backfire if pricing caused
by more hawkish Fed expectations is not validated by actual Fed
policy," said Dan Dorrow, head of research at FX broker Faros
Trading, in Stamford, Connecticut.
CHOPPY DOLLAR/YEN TRADING
The dollar shifted between gains and losses against the yen,
but sold off in the New York session as investors considered
that the recent five-day advance had gone too far, too fast. It
had risen earlier against the Japanese currency after Bank of
Japan Deputy Governor Kikuo Iwata said the central bank still
has options for monetary easing, if need be.
In late afternoon trading, the dollar was down 0.2 percent
at 97.67 yen, below an earlier peak of 98.70, its highest
since June 11.
Changes in the price of the dollar against the yen were
mostly in response to moves in European stocks. After investors
digested comments from the BoJ's Iwata, the dollar surrendered
gains as investors traded on other factors.
Iwata, a vocal advocate of reflationary policies, said if
the BoJ were to boost asset purchases in the future, he would
favor government bonds over risky assets, given the size of the
vast market for Japanese government bonds, or JGBs.
The euro also fell 0.2 percent to 128.19 yen.
The dollar's gains against the euro, meanwhile, were
tempered by a survey showing a small increase in German business
morale, which helped keep the single currency above key chart
support. The euro was last little changed at
Rate differentials between 10-year Treasury notes and
similarly-dated German Bunds have moved in favor
of the former, with spreads at their highest since April 2010.
Analysts at Morgan Stanley, who recently recommended selling
the euro with a target of $1.28, have lowered their entry level
for the trade to $1.3180. A sustained break below the 200-day
moving average, currently at $1.3072, would be a bearish signal,
Volume picked up in the New York session, with $3.7 billion
in euros changing hands globally by late afternoon trading,
using Reuters Dealing data. Some $2.4 billion in yen traded.
The higher-yielding Australian dollar, which is
sensitive to concerns about growth in China, recovered from an
earlier 33-month low. The Australian dollar was last up 0.5
percent at US$0.9260 after falling as low as $0.9145.
A recent spike in interbank borrowing costs have raised
fears that stress in China's banking system could weigh on
already slowing growth.