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Thursday December 9, 2010 - 13:07:22 GMT
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FOREX NEWS - Dollar up on yields; euro slips on Irish downgrade

7:23am EST

* Dollar supported by higher Treasury yields, U.S. tax cuts

* Euro slips after Fitch downgrades Ireland

* Market awaits 30-yr U.S. debt auction, U.S. jobless claims

(Adds comment, updates throughout)

By Naomi Tajitsu

LONDON, Dec 9 (Reuters) - The dollar edged up on Thursday, still supported by a jump in U.S. Treasury yields this week, while the euro slipped after ratings agency Fitch downgraded Ireland's sovereign debt.

Fitch cut its rating on Ireland to BBB+ to reflect the additional costs of restructuring Dublin's ailing economy and banking sector, after Dublin secured a bailout from its European neighbours last month. [ID:nWLA0394]

The dollar continued to draw support from an extension of U.S. tax cuts announced this week, but further gains were capped as a retreat in the benchmark 10-year U.S. Treasury yield from a six-month high hit on Wednesday quelled demand for the dollar.

Analysts said the extended tax cuts were seen as supportive for the economy and therefore the dollar, while U.S. Treasuries have sold off heavily this week, as the stimulative move fuelled fears of inflation and deteriorating U.S. fiscal health. [US/]

"The latest fixation is the tax issue and that's created a bond angle, and it's created a growth story that is positive for the U.S.," said Daragh Maher, FX strategist at Credit Agricole.

Other analysts said investors were wary of taking on big positions as liquidity dries up towards year end, and this was why the dollar's rise had been limited compared with the jump in Treasury yields.

The dollar index has risen only 0.7 percent this week as the 10-year U.S. Treasury yield has soared around 25 basis points.

"We've seen a corrective move in U.S. Treasuries, whereas at the moment, we don't see a need for such a corrective move in the dollar," said Antje Praefcke, FX analyst at Commerzbank in Frankfurt.

The U.S. bond market may be vulnerable to more selling if a 30-year U.S. Treasury auction on Thursday attracts only limited demand. A 10-year auction on Wednesday saw average demand.

The dollar index .DXY, which tracks the dollar's moves against a currency basket, inched up 0.2 percent to 80.172. It crept above its 100-day moving average at 79.953, which seen as supportive for the U.S. currency.

The 10-year U.S. Treasury yield US10YT=RR was at 3.25 percent, pulling back from a high of around 3.33 percent hit on Wednesday.

The euro EUR= slipped 0.4 percent to the day's low of $1.3195, retreating from a high around $1.3320.

In thin trade, traders said euro selling by a system-related trading fund helped to push the euro lower, while corporate demand to dump the single currency was also seen.

Market participants say concerns over euro zone countries' debt financing could resurface at any time to hurt the euro.

The dollar JPY= was flat on the day at 84.05 yen.


Analysts say the jump in the benchmark Treasury yield has provided an opportunity to pick up dollars, as the rise can help to increase the rate differential between U.S. assets and those of other currencies, supporting the U.S. currency.

But Maher at Credit Agricole argued the correlation between currencies -- particularly the euro, the yen and the Australian dollar -- and movements in two-year yield differentials were stronger than for 10-year yields.

The two-year yield has risen less than 15 basis points so far this week, much less than the 10-year yield, as the short end of the yield curve has been anchored by expectations the Federal Reserve is unlikely to raise interest rates soon.

"For interest rates to gain greater traction on FX, the shorter end has to move, and we're not seeing that yet," Maher said. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

Graphic on U.S. tax cuts, stimulus and deficits

Graphic on the yen and Japan/U.S. bond spreads:

Graphic on the euro and German/U.S. bond spreads:

For story on tax deal impact on stocks see [ID:nN08175057] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

Traders say weekly U.S. initial jobless claims data at 1330 GMT could trigger a rise in bond yields. The data last week showed the four-week moving average of the claims at a two-year low, stoking optimism about the U.S. recovery.

(Graphics by Scott Barber)

© Thomson Reuters 2010. All rights reserved.




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