* Dollar index down from two-month peak
* Solid U.S. jobs data keeps December tapering view alive
* Diverging Fed/ECB policy path expected to mute euro
NEW YORK, Nov 11 The dollar paused in its
advance against the euro on Monday after two days of strong
gains, with a further rise seen depending on whether U.S. bond
yields keep rising amid an intensifying debate on when the
Federal Reserve might scale back its stimulus.
But a U.S. government holiday on Monday kept many investors
on the sidelines and volumes low. While the euro managed to
retrace some of its recent losses, analysts cautioned against
reading too much into Monday's trading.
"It's a very quiet day with more of a relief bounce" in the
euro, said David Song, Currency Analyst at Daily in New York. "I
think the euro could be in line for another move lower from
The euro climbed to $1.3412 on lower-than-usual
volumes, but gains were capped as investors began to sell it
from around $1.3400 through to $1.3410. The euro hit a two-month
low of $1.3295 last Thursday after the European Central Bank
shocked the market with a surprise cut of its main interest rate
to a record low 0.25 percent.
The euro zone currency was last trading up 0.3 percent at
$1.3402. Against the Japanese yen, the dollar gained 0.1
percent to 99.20 yen.
"The dollar has come off slightly, but the defining factor
is the rise in the U.S. yields," said Jeremy Stretch, head of
currency strategy at CIBC World Markets in London. "The dollar
will be supported and for the euro any bounce toward $1.34 will
be sold into."
The dollar index dipped 0.2 percent to 81.108, after
having set a two-month high at 81.482 after a report on Friday
showed U.S. employers added 204,000 new jobs last month, well
above the 125,000 new jobs forecast.
The data was even more surprising as it came in a month when
a budget standoff in Washington forced a 16-day government
shutdown, suggesting the U.S. economic recovery was on a firmer
footing than previously thought.
As a result, U.S. Treasury yields rose, with the gap between
two-year U.S. Treasuries and their German
counterparts at its widest since mid-July. U.S. bond
markets were shut on Monday and with yields rising quickly in
the past week, some expect Treasuries to consolidate.
The benchmark 10-year U.S. Treasury note's yield
was also near a two-month high as some investors brought forward
to December their expectations of when the Fed will start to
withdraw its stimulus.
That underpinned the dollar as rising yields make a currency
more attractive to hold. After the government shutdown, most had
pushed back the Fed's "tapering" expectations to March 2014.
SELL THE EURO
Speculators have cut long euro positions and this trend
could gather pace with the euro zone facing a prolonged period
of slowing inflation. That could see the ECB deploying more
aggressive monetary easing instruments.
"We think investors are caught long near $1.3450, with
euro/dollar primed for a move toward $1.32 - a level euro zone
and U.S. two-year yield differentials would point toward," said
Chris Turner, chief currency strategist at ING in London.
Just $2.89 billion in euros traded on Monday using Reuters
Dealing data , making it the lowest-volume day for the
euro since Oct. 21.
Although the ECB's rate-setting committee was split about
Thursday's decision to cut rates, Executive Board member Benoit
Coeure said on Saturday that the bank could trim interest rates
further and provide more liquidity.