May 15, 2013 / 3:40 AM / 4 years ago

FOREX-Dollar remains buoyant, close to 4-1/2-yr high vs yen

4 Min Read

* Dollar/yen resistance at 103.25 -strategist

* Euro steady after drop to 5-week low vs dollar

* Dollar index muscles up, close to highest level since July 2012

By Sophie Knight and Lisa Twaronite

TOKYO, May 15 (Reuters) - The dollar pulled back a tad against the yen on Wednesday after shooting to its highest level since October 2008, but remained strong across the board, emboldened by signs of a firmer recovery in the U.S. economy and rising Treasury yields.

Against a basket of currencies, the dollar edged up 0.1 percent to 83.589, just below its Tuesday high of 83.687, its loftiest level since July 2012.

The greenback retreated 0.1 percent to 102.24 yen, after reaching as high as 102.42 in the previous session on the EBS trading platform.

According to analysts and strategists, the next knot of resistance for the dollar-yen lies at 103.50.

"Right now the market is dominated by dollar strength, and I think that will continue for a while," said Kyosuke Suzuki, director of FX at Societe Generale.

"It's mainly down to strong data- and if employment drops to just above 7 percent, near to the Fed's mandate of 6.5 percent, then I think an end to its easing programme could be in sight."

On Tuesday, data showed U.S. import prices fell in April due to a drop in oil costs, a positive sign for household finances that also indicated benign inflation pressures.

Signs of an improving economic landscape in the U.S. have fired up speculation that the U.S. Federal Reserve will begin to wind down its asset-purchasing programme as soon as this year, which would likely push Treasury yields higher.

With U.S. 10-year yields approaching 2 percent, analysts expect Japanese investors to realise that they offer an opportunity for yield and capital appreciation as the Bank of Japan's policies weaken the yen - even though the U.S. Federal Reserve is preparing to remove its stimulus.

The BOJ could further ease monetary policy as early as October if prices do not rise as quickly as projected, according to economists polled by Reuters, who also upgraded their growth forecasts.

Japanese government bond prices extended their fall for a fourth session on Wednesday. While that means the spread between benchmark U.S. and Japanese bond yields is currently shrinking, it is expected to widen in the long term as the Fed reduces its easing, incentivising Japanese investors to move their money abroad.

The euro was steady at $1.2935 after slumping to $1.29205 earlier in the session, its lowest in more than five weeks.

The single currency remains on the defensive amid the potential risk of the European Central Bank slashing its deposit rate into negative territory and charging depositors for parking their funds with the ECB.

Due to the yen's broad weakness, however, the common currency held near a fresh 3-year high struck on Tuesday of 132.78 yen, although it edged down 0.1 percent on late U.S. levels to 132.11.

"Yesterday we saw some real money inflows pushing the euro/yen up, but I think this is pretty much its trading range for now. It will be difficult for it to break out without some positive euro zone factors," said Suzuki of Societe Generale.

The Australian dollar remained under pressure after a rate cut from the central bank last week kicked it under parity, dropping 0.1 percent to $0.9883. However, it held just above a fresh 11-month low of $0.9877 plumbed on Tuesday.

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