* Euro falls against dollar and yen
* Higher rate premium for dollars hurting euro
* Large option expiries weigh on trade
* Dip in yuan against dollar also seen as factor
(Updates with fresh prices, quotes)
By Patrick Graham
LONDON, June 10 The euro fell against the dollar
and yen on Tuesday, feeling the pressure of a rise in the
premium for holding the U.S. currency since the European Central
Bank cut all of its main rates last week.
The jury remains out on whether a series of policy moves by
the ECB and an improvement in the U.S. economy are enough to
weaken the single currency more durably and end a period of low
volatility brought on by universally low interest rates.
Large volumes of expiring euro-dollar options at and on
either side of $1.3600 were keeping the market around that level
and traders said there were also expectations that Asian central
banks would support the euro above $1.3520.
The single currency stopped just short of those levels after
falling a third of a percent in morning trade in Europe.
"There is a lot against the euro at the moment," said one
London-based currency spot dealer. "We only have U.S. data to go
on this week, which should be strong, and the U.S. bond market
gives you every reason to back the dollar a bit higher."
Many short-term bets on further euro weakness were squeezed
out after the ECB's decision last week as many players chose to
take profit on an almost five-cent fall since early May.
But the premium bond and money markets give investors for
holding the dollar has steadily climbed in the meantime, drawing
in a new round of bets against the euro.
Hans Redeker, head of global foreign exchange strategy at
U.S. bank Morgan Stanley in London, argued that U.S. retail
sales numbers on Thursday would add to the more positive picture
of U.S. growth and to both a stronger dollar and stronger yen.
"The next big thing is going to be higher volatility. That
is going to lead to a stronger dollar, but also the yen
outpacing the dollar," he said.
The euro traded at $1.3545 and was more than half a percent
weaker against the yen at 138.55 yen.
The dollar index rose to 80.81 , pulling
further away from a near two-week trough of 80.240 touched last
Friday. The yen was up 0.2 percent against the dollar at 102.33
The fall in euro zone peripheral bond yields, conversely,
has been one of the big pieces of evidence explaining the euro's
broader strength so far this year.
Investors seeking higher returns than the almost zero rates
offered by benchmark U.S. and German instruments have poured
money into Greece, Spain, Italy and Ireland.
But after another surge last Friday, there were signs that
the rally in some of those bond markets is starting to ease.
Italian two-year bond yields, which rise as
prices fall, are up 12 basis points since Friday.
The benchmark yield spread of two-year U.S. Treasuries over
two-year German debt, however, widened to almost 37 basis points
on Tuesday, , the highest since 2007. Euro
zone overnight interbank interest rates were at their
lowest levels on record.
"Rate differentials are partially to blame (for the euro's
fall), with U.S. yields rising all morning and the U.S. 10-year
breaking yesterday's high," said Stephen Gallo, European head of
FX strategy with Canadian bank BMO in London.
"However, we also believe the shift towards a stronger yuan
by the Chinese central bank is a very important culprit for EUR
weakness, as expectations for USD-to-EUR reserve recycling have
(Editing by Nigel Stephenson and Alison Williams)