Rising Treasury yields lift U.S. dollar

NEW YORK (Reuters) - The dollar rose versus the yen on Wednesday and looked poised to extend gains after a proposed extension of tax cuts sparked a rally in U.S. bond yields.

U.S. dollar notes are seen in this picture illustration taken at the Bank of Taiwan in Taipei November 11, 2010. U.S. REUTERS/Nicky Loh

For the first time in weeks, euro zone debt concerns were placed on the back burner as investors focussed on U.S. economic and interest-rate fundamentals in a thinning market as the end of the year approaches.

U.S. Treasury prices plunged for a second straight day, pushing benchmark yields to a six-month high. Higher yields tend to boost the greenback, enhancing the attractiveness of dollar-denominated assets.

While the tax deal also fuelled fears about deteriorating U.S. fiscal health, which is negative for the dollar, currency investors have focussed more on the better growth prospects that the tax cuts may induce, at least for now.

“The whole interest-rate differential argument is turning out to be dollar supportive, at least in the near term,” said Paresh Upadhyaya, head of Americas G10 FX Strategy at BofA Merrill Lynch Global Research in New York.

“I do think that in the longer term, the rising budget deficit is clearly dollar negative,” he added.

Some analysts said the tax cuts could boost U.S. gross domestic product growth by as much as 2 percentage points next year.

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“What this means is that it reduces the probability or the odds of quantitative easing, which is good for the dollar,” said Richard Franulovich, senior currency strategist, at Westpac in New York.

The dollar last traded up 0.6 percent at 83.99 yen after hitting a session high at 84.31 yen on trading platform EBS.

Against a basket of six currencies, the dollar index rose 0.2 percent to 80.052, moving above its 100-day moving average at 79.981. If sustained that would be a bullish signal.

The dollar pared gains versus the yen and euro following a $21 billion (13 billion pounds) sale of 10-year Treasury notes, which pushed yields off their highs.


For the near-term, resistance for dollar/yen is around 84.40, which will attract offers from Japanese exporters. A break of that level could see the pair extend gains towards 84.60, followed by 85.40 and a retest of the September high around 85.95 yen, traders said.

In the options market, traders said there was high investor demand for bullish dollar/yen option structures, ranging from calls, call spreads, to barrier-type options where there’s a pay-off if the pair rises.

The euro fell 0.1 percent to $1.3248. Its failure this week and last to hold above $1.3400 suggests a probe lower, with a sustained break of $1.3180 opening the way for a test of $1.3060/50.

Bids from Asian central banks and Middle East accounts were seen around $1.3200 and $1.3180, respectively, traders said.

Ireland moved a step closer to securing bailout funds after passing the first in a series of votes on its toughest budget on record, but traders said investors were still likely to sell the euro on any bounce, given worries about the European Union’s ability to keep debt problems from spreading.

Sentiment in the options market remained negative on the euro, with investors buying new bearish structures, although volume has fallen from highs seen two weeks ago, traders said.

Additional reporting by Gertrude Chavez-Dreyfuss; Editing by Kenneth Barry