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Thursday May 29, 2008 - 12:01:33 GMT
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FOREX NEWS-Dollar rallies as U.S. bond yields jump, oil retreats

 

Thu May 29, 2008 7:48am EDT

By Naomi Tajitsu

LONDON, May 29 (Reuters) - The dollar rose against a basket of major currencies on Thursday after hawkish Federal Reserve comments prompted a jump in short-dated U.S. bond yields, lifting demand for assets denominated in the U.S. currency.

The U.S. currency was also bolstered after U.S. durable goods data came in less weak than expected, quelling some jitters about U.S. economic health. Retreating oil prices also offered broad dollar support.

"We've seen a big uptick in U.S. yields," said David Pais, currency strategist at Citigroup. "It's very much U.S.-euro yield differentials that is driving euro/dollar lower."

The euro slipped 0.5 percent to $1.5547 <EUR=>. Some traders also said that selling in the pair by Russian names was pulling the pair away from one-month highs hit earlier this week at $1.5818.

Two-year Treasury yields <US2YT=RR> surged 12 basis points to 2.7546 percent, its highest since the start of the year, after Dallas Fed President Richard Fisher on Wednesday said that U.S. rates may rise "sooner rather than later" if inflation persists [ID:nN2852973].

In the euro zone, the two-year Schatz yield <EU2YT=RR> hit a nine-month high of 4.303 percent, but its rise was only half that of its U.S. counterpart.

The euro also lost ground after figures showed the first rise in Germany's seasonally adjusted jobless total in over two years [nBAE001233]. At the same time, euro zone economic sentiment stabilised in May, but consumers became more gloomy.

The dollar rose half a percent on the day to 72.926 against a basket of six major currency rivals .DXY, approaching a two-week high. It rallied by the same amount to 105.29 yen <JPY=>.

Analysts also said that an ongoing retreat in U.S. crude oil prices from a record high at $135.09 per barrel CLc1 was also prompting technical gains in the dollar.

INFLATION VS GROWTH

Data on Wednesday showing U.S. durable goods orders fell by a smaller-than-expected 0.5 percent last month bolstered a view that the U.S. central bank may have left its aggressive monetary easing campaign behind it for now after slashing borrowing costs to 2 percent.

But hawkish comments from Fed members Fisher and Minneapolis Fed President Gary Stern, who said that the Fed must quit its monetary easing campaign at some point, suggested that inflation risks were not far away from policymakers' minds.

While the statements suggest that the U.S. central bank may soon end its rate-cutting cycle, analysts were wary about how sustainable dollar resilience was in light of a potentially toxic inflation versus growth mix.

"A hawkish Fed, or a more hawkish Fed, does not necessarily mean a stronger dollar in our view -- given the fact that the growth outlook still remains uncertain, consumer confidence is very weak and oil is high," said Phyllis Papadavid, currency strategist at SocGen.

"The Fed like most central bankers is stuck between a rock and a hard place and their hawkishness is not reflective of comfort on the growth outlook, it's more to do with prospects for ugly inflation," she added.

Inflation and growth will dominate the U.S. data agenda later on Thursday, with core PCE (personal consumption expenditure) prices and U.S. first quarter preliminary GDP figures due at 1230 GMT. (Additional reporting by Veronica Brown, editing by David Christian-Edwards)

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