Dollar Gains, Fired by Surging Treasury Yields
Reuters, October 26, 2005
NEW YORK (Reuters) - The dollar rallied on Wednesday, as surging Treasuries yields burnished the attraction of dollar-denominated deposits to foreign investors, traders said.
"We have seen dollar/yen in particular go up. With yield spreads widening between Japan and the United States, that has been a major mover in dollar/yen," said John McCarthy, director of foreign exchange trading at ING Capital Markets LLC in New York.
The benchmark 10-year Treasury note's yield, which moves inversely to its price, rose to just above 4.60 percent from 4.54 percent late on Tuesday.
One catalyst for the rise of longer-dated Treasury yields, McCarthy said, was "a delayed reaction" to President Bush's announcement on Monday that he would nominate Ben Bernanke to succeed Alan Greenspan as Federal Reserve Chairman.
"There is a degree of market uncertainty that he could be less of an inflation fighter than Greenspan and the fact that he is new and untested," McCarthy said.
The dollar also garnered supported from some inflows by U.S. companies repatriating funds to take advantage of this year's one-time tax break, said Tim O'Sullivan, trading manager with Gain Capital in Warren, New Jersey.
Early morning in New York, the dollar was trading at 115.74 yen, up 0.6 percent from late Tuesday.
The euro, which was broadly supported by strong buying of euros against yen, traders said, was at $1.2073 down 0.3 percent, after hitting a 2-week high of $1.2139 earlier.
Against the yen, the euro was trading at 139.72 yen, just off a six-month high of 139.74 yen hit earlier.
Traders reported interest from Japanese investors to buy euros seeking to buy euro zone bonds.
Against the dollar, the euro's losses were mitigated by a contrasting picture of the economic outlook from Tuesday's data between the euro zone and the United States.
The U.S. Conference Board's consumer confidence index for October released on Tuesday fell to a two-year low of 85.0, fuelling concerns that soaring oil prices could curb U.S. consumer spending. Germany's Ifo business climate index rose to a five-year high in October of 98.7.
RATE DIFFERENTIALS
The dollar's widening interest rate advantage over the euro and the yen has been the main driver of the U.S. currency's bull run so far in 2005.
The U.S. central bank has raised rates 11 times since June 2004, lifting the fed funds rate to 3.75 percent -- well above the euro zone's benchmark rate of 2 percent.
But a view that the ECB could raise rates sooner rather than later has given the euro a boost recently.
"You could argue the German data shifted the balance a little and lent credibility to the view that euro zone rates are going higher. Whether this comes to anything is another thing," said Ian Gunner, head of FX research at Mellon Bank.
Fed Chairman Alan Greenspan speaks at 1745 GMT and European Central Bank Governing Council member Axel Weber is due to speak again at 1700 GMT. On Friday a range of ECB policymakers, including President Jean-Claude Trichet, are expected to speak.
