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Wednesday June 10, 2009 - 20:18:09 GMT
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FOREX NEWS-US dollar rises as fears over govt debt sales ease

Wed Jun 10, 2009 4:05pm EDT

* U.S. dollar recovers after drop on Russia's comments

* Higher risk appetite fades; euro, sterling retreat

* U.S. Treasury sells $19 billion in 10-year notes

* Doubts about strength of global recovery linger (Adds comments, details, updates prices)

By Vivianne Rodrigues

NEW YORK, June 10 (Reuters) - The U.S. dollar rose broadly on Wednesday as an auction of $19 billion in 10-year Treasury notes eased some investor fears about the United States' ability to sell long-term debt to help finance a ballooning budget deficit.

The dollar fell earlier after Russia's central bank said it will diversify its currency reserves by cutting U.S. Treasury purchases and buying IMF-backed bonds. But analysts said any Russian plans to diversify away from dollars would take time. For more see [ID:nLA1052951].

The Treasury Department sold 10-year notes at a high yield of 3.99 percent as part of a combined sale of $65 billion in government debt this week. Wednesday's auction was the first real test of the government's long-term borrowing ability since investors began to wonder last month whether its prized AAA credit rating may be living on borrowed time.

"There were concerns about appetite for Treasuries. The results of this auction have put to rest those concerns for the time being and any peripheral fears about the dollar as a safe store of value have also been put aside," said Michael Woolfolk, senior currency strategist, at The Bank of New York Mellon in New York. "This is positive for the dollar overall."

Traders also said the euro's rise to $1.4145 earlier <EUR=EBS> triggered automatic sell orders that pushed it to $1.3915 before moving to $1.3980, down 0.6 percent on the day.

The dollar extended gains after a Federal Reserve report on U.S. economic conditions, known as the Beige Book, said the economy was still weak but there were signs that the slide was easing. [ID:nWEQ001087]

Woolfolk added the Fed report appeared to have prompted an increase in risk aversion that was giving further support to the greenback in afternoon trading.

The dollar rose 0.8 percent to 98.22 yen <JPY=EBS>, according to electronic trading platform EBS.

HIGHER US YIELDS

The dollar gained even as stocks and bonds sold off after the auction. Bonds extended losses after the debt sale, with the benchmark 10-year note <US10YT=RR> yield rising to as much as 4.00 percent after the sale, its highest since October.

"The rise in yields is seen as largely a normalization process," Marc Chandler, a senior currency analyst at Brown Brothers Harriman in New York, said in a note.

"Ideas that the Fed will increase its purchases of Treasuries before the next FOMC meeting have been dampened in recent days. It is not clear that there is sufficient appetite among officials to buy a sufficient amount of Treasuries to really cap yields," he added.

Russia's plans to diversify its reserve holdings also sent U.S. Treasury yields higher early Wednesday and initially added to broad-based dollar selling.

Russia holds about 30 percent of its $404.2 billion foreign exchange reserves in Treasuries, making it the fifth-largest holder of U.S. government debt. [ID:nLA1052951]

But analysts said Russia's roughly $140 billion in long-dated U.S. Treasuries pales in comparison to the sheer volume of outstanding debt. The Treasury plans to issue some $2 trillion this year alone.

With the U.S. budget deficit expected to hit about $1.8 trillion this year and rise even further from there, "of course everyone wants to diversify their holdings in the long run," said Firas Askari, head of FX trading at BMO Capital Markets, in Toronto. "But they're all long Treasuries and can't just dump them at once," he added. (Additional reporting by Steven C. Johnson and Gertrude Chavez-Dreyfuss; Editing by James Dalgleish)

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