* Dollar index holds near three-year highs
* Greenback touches new 4-1/2-year high against yen
* Fed could step down bond-buying pace if economy improves
* Aussie approaches 1-year low after China factory activity
By Sophie Knight and Ian Chua
TOKYO/SYDNEY, May 23 The dollar bounded up to a
three-year high against a basket of major currencies in Asia on
Thursday, squeezed higher after Treasury yields jumped on the
prospect that the Federal Reserve might scale back its stimulus
programme this year.
The dollar index raced as high as 84.498, a peak not
seen since July 2010, before paring gains back to 84.348.
The greenback last bought 103.07 yen after setting
a new 4-1/2-year high of 103.74 overnight. It had reached toward
that level earlier in the session as the 10-year Japanese
government bond yield rose to 1.000 percent, its highest in more
than a year, after Treasury bonds beat a hasty
The moves came after Fed chief Ben Bernanke told Congress
that the central bank could "in the next few meetings take a
step down" in its bond purchases and warned that holding
interest rates too low for too long has its risks.
But Bernanke said that any decision to reduce its buying
would not mean the Fed would automatically push for a complete
roll back of the stimulus, and set the bar quite high for any
scale-back of the Fed's bond purchases.
"Rather we would be looking beyond that to see how the
economy evolves and we could either raise or lower our pace of
purchases going forward," he said.
Still, dollar bulls cheered, bidding the greenback up across
the board. The euro was down 0.1 percent at $1.2844, not
far from this month's nadir of $1.2796, after striking as high
as $1.2998 on Wednesday.
"From the beginning of May, the yen's slide slowed down or
stopped against a number of currencies, but the dollar's broad
strength means it continues to slide against USD," said Minori
Uchida, chief FX analyst at the Bank of Tokyo-Mitsubishi UFJ.
"Everyone said it would be hard for it to get over 95, 100,
and 103, so I don't think there's much blocking it from 105...as
long as the factors that have driven dollar strength don't
change, putting a floor under the yen will be difficult."
The yen has dropped 6 percent against the dollar since the
beginning of May, compared to 3.4 percent against the euro
and 2.5 percent against sterling. Against
the Aussie, the yen has actually gained 1.4 percent this month.
On Thursday, the Aussie slumped 0.6 percent to 99.36 yen,
cracking the 100 yen level and its 50-day moving
average at 100.60, after data showed factory activity in China
shrank for the first time in seven months in May.
The flash HSBC Purchasing Manager's Index (PMI) for China,
Australia's biggest export market, dropped to 49.6, slipping
under the 50-point level demarcating expansion from contraction
for the first time since October.
That left the Aussie languishing 0.6 percent down at $0.9634
and fast approaching its June 2012 trough of $0.9581.
The currency has shed 7 percent this month as the U.S. dollar
has surged across the board and the central bank surprised with
a rate cut.