* Elevated U.S. bond yields help dollar
* Gap between 2-yr US/Japan bond yield at 1-1/2 yr high
* Euro hits 1-month high versus yen
By Anirban Nag
LONDON, Aug 23 The dollar hit a three-week high
against the yen on Friday and climbed versus a basket of
currencies, helped by this week's rise in U.S. bond yields.
The dollar index has a strong correlation with U.S.
Treasury yields which have spiked on rising expectations that
the Federal Reserve will slow its bond-buying programme as early
as next month.
Higher yields make holding dollar-denominated assets
attractive with the gap between two-year U.S. Treasury yields
and their Japanese counterparts at its
highest since March 2012. That will draw more Japanese investors
into U.S. Treasuries and help the dollar, analysts said.
The dollar rose 0.3 percent to 99 yen, having hit a
three-week high of 99.14 yen on trading platform EBS. Traders
cited decent demand from U.S. funds and Japanese buyers with
stop-loss buy orders cited above 99.15 yen.
"We have seen a bit more interest in buying dollars after
the Fed minutes earlier this week," said Chris Walker, currency
strategist at Barclays. "We are forecasting the 10-year U.S.
yields to rise to 3.75 percent by the end of the third quarter
of 2014. That should be helpful for the dollar."
Treasury yields got a boost this week after minutes of the
Fed's July meeting released on Wednesday did little to change
market expectations of the Fed's tapering timetable.
The U.S. 10-year Treasury yield last stood near 2.892
percent, having set a two-year high of 2.936 percent
on Thursday. With the Bank of Japan set to keep policy
ultra-loose after embarking on a massive stimulus programme in
April, the gap between 10-year U.S. bond yields and Japanese
government bonds was near its highest since April 2011.
Investors were also keeping an eye on moves in Japanese
shares, since the yen has moved in opposing directions to the
benchmark Nikkei share average this year.
The Nikkei rose 2.2 percent on Friday after business
surveys on Thursday suggested the world economy was on the mend,
with U.S. and Chinese manufacturing activity at multi-month
highs and business activity in the euro zone picking up.
The euro touched a one-month high against the yen at 132.34
yen and last stood near 132.05 yen, up 0.15 percent.
Against the dollar, the euro eased 0.1 percent to $1.3341
, but remained above Thursday's intraday low near $1.3299.
The euro had set a six-month high of $1.3453 earlier this
week, supported by a recent improvement in euro zone economic
data. A second reading of German gross domestic product data
confirmed that Europe's biggest economy grew by 0.7 percent in
the second quarter, helped by domestic demand..
The recent pick up has pushed euro zone money market rates
higher and if sustained is likely to challenge the effectiveness
of the European Central Bank's pledge to keep rates low until a
full-fledged recovery is in place.
"The euro seems irrepressible at the moment, but we think
the Fed normalisation story will win out for the dollar," said
Chris Turner, head of currency strategy at ING.