December 29, 2010 / 9:17 PM / 7 years ago

FOREX-Dollar slides after strong auction hits bond yields

* U.S. bond yields fall after solid seven-year auction

* Swiss franc near record high; commodity currencies firm

* Euro holds above 200-day moving average (Updates prices, adds comment, details)

By Wanfeng Zhou

NEW YORK, Dec 29 (Reuters) - The dollar hit a seven-week low against the yen and dropped versus the euro on Wednesday, as U.S. government bond yields tumbled following a solid debt auction, diminishing the appeal of the greenback.

Rising global stock prices on expectations of stronger economic growth in 2011 also lifted investors' appetite for higher-yielding currencies and pressured the safe-haven U.S. dollar, analysts said.

U.S. Treasuries extended price gains, pushing yields sharply lower, after a $29 billion auction of seven-year notes drew surprisingly strong demand a day after a weak five-year sale. Lower bond yields make the dollar less attractive as it erodes the return on U.S. assets. For details, see [ID:nN29284358]

"The reaction in the bond markets is fairly sharp," said Vassili Serebriakov, currency strategist at Wells Fargo in New York. "There's a broader move towards a weaker U.S. currency."

Thin trading ahead of the New Year's holiday likely exaggerated currency moves, traders said.

The dollar fell as low as 81.61 yen JPY=EBS on trading platform EBS, the lowest since Nov. 10. It was last down 1 percent at 81.64 yen. Support is seen around 81.50 yen.

Citigroup technical analysts said the downward momentum in dollar/yen may continue after the recent double top close to 84.50 and the recent dead cross constructed by the five- and 21-day moving averages.

"Based on the double top, the downside limit may be 80.21, the lowest level of the year," they said. "However, we do not expect this price action to be long lived."

The Australian dollar AUD=D4 rose as high as $1.0184, a 28-year peak. Rising commodity prices boosted the Aussie and helped investors shrug off fear that a recent Chinese interest rate hike would slow the economy. London Metal Exchange copper hit a record high [MET/L].

"There's an underlying theme of more optimistic markets or stronger risk appetite this week," Wells Fargo's Serebriakov said.

"With optimism about the U.S. economy and global economy starting to pick up again and with the Federal Reserve continuing to pump liquidity into the financial system, this should help risk appetite and risk-sensitive currencies and probably weigh on the dollar broadly," he said.

EURO WORRIES REMAIN

The euro hit a session peak at $1.3240 EUR=EBS on EBS before pulling back to last trade at $1.3219, up 0.8 percent.

Worries that the euro-zone debt crisis could spread to Spain and Portugal have many analysts bracing for more euro weakness in early 2011, but the currency's stubborn refusal to break below the 200-day moving average, now at $1.3086, has frustrated bearish investors.

While the euro may see a rebound toward $1.35 in the near term, any sustainable gains look unlikely, analysts said.

"The big issue in this case still remains whether or not the EU will come through with some sort of tangible rescue fund or if it will continue to bail out troubled nations on a case-by-case basis," said Brendan McGrath, manager of business solutions at Western Union Business Solutions, in Victoria, British Columbia. "The market is clearly looking for something proactive from the EU before they get long euros again."

Analysts said year-end positioning was driving prices as well. That's been the case with the yen and Swiss franc, both of which have risen over recent days on repatriation flows.

The euro was last at 1.2511 Swiss francs EURCHF=EBS, more than half a cent from a record low, while the dollar fell to 0.9466 francs CHF=EBS, near Tuesday's 0.9435 record low. (Additional reporting by Steven C. Johnson; Editing by Leslie Adler)

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