May 6, 2015 / 7:51 AM / 4 years ago

FOREX-German Bund sell-off lifts euro towards 2-month highs vs dollar

* Dollar under fresh pressure after weak trade data

* Big trade deficit could mean negative Q1 GDP

* Rising Bund yields support euro (Recasts, adds comments)

By Anirban Nag

LONDON, May 6 (Reuters) - The euro rose towards recent two-month highs against a softer dollar on Wednesday, buoyed by rising German 10-year Bund yields that hit their highest this year and narrowed the gap over U.S. Treasuries.

The euro was also helped by business surveys that pointed to nascent signs of a pick up in the euro zone and news that Greece has made a 200-million-euro interest payment to the International Monetary Fund that fell due on Wednesday.

The yield gap between U.S. 10-year Treasury yields and their German counterparts shrank to about 165 basis points, the narrowest since late March.

As a result, the euro rose 0.6 percent to $1.1264 in early European trade, edging back in the direction of a two-month high of $1.1290 set on Friday.

“The sell-off in Bunds and the rising yields is helping euro/dollar,” said Yujiro Goto, currency strategist at Nomura. “We think, given how significantly short the market is on the euro, there is scope for the euro to rise further in the short term, especially if the sell-off in Bunds continues.”

Benchmark 10-year Bund yields now trade at 0.55 percent, having hit a record low of 0.05 percent last month, when many investors expected them to turn negative. Spanish and Italian bond yields also rose close to 2 percent.

Mitul Kotecha, head of currency strategy for Asia-Pacific at Barclays in Singapore, said recent moves in yield differentials seemed to be weighing on the dollar.

“We are seeing U.S. yields higher, but at the same time yields elsewhere are also rising,” he said. “Even though U.S. yields are moving higher, the differential certainly with the likes of the euro and Aussie dollar has worsened,” Kotecha said.

The dollar index, which measures the greenback’s value against a basket of currencies, fell 0.4 percent to 94.687 , pulling away from a one-week high of 95.946 hit on Tuesday.

The dollar was also on the defensive after disappointing U.S. trade data for March painted an even bleaker picture of the economy in the first quarter.

Later on Wednesday, the focus will shift to a report on U.S. private-sector employment that may affect expectations for Friday’s U.S. nonfarm payrolls report.

Recent indicators, including a drop in jobless claims to a 15-year low in the week ended April 25, point to an improvement in the U.S. labour market, analysts said. (additional reporting by Masayuki Kitano; Editing by Andrew Heavens)

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