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Saturday June 9, 2007 - 03:46:35 GMT
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FOREX News-Dollar hitches ride higher on surging bond yields

FOREX-Dollar hitches ride higher on surging bond yields
Fri Jun 8, 2007 4:41 PM ET

(Refiles to fix typo in first paragraph) (Updates prices, adds detail)

By Steven C. Johnson

NEW YORK, June 8 (Reuters) - The dollar hit a two-month high against a basket of major currencies on Friday as rising yields added to U.S. Treasury debt's advantage over other major government bonds, drawing buyers looking for higher returns.

Benchmark Treasury yields moved nearly a quarter-percentage point higher this week, making U.S. debt more attractive to U.S. and foreign buyers and prompting investors to ditch expectations of a Federal Reserve interest rate cut this year.

Government bond yields have been climbing on the view that the global economy remains healthy and central banks will keep raising interest rates to ward off inflation.

Data on Friday showing the U.S. trade deficit narrowed in April reinforced views that the economy was improving after a weak first quarter, further weakening the case for rate cuts.

U.S. interest rate futures now imply no cuts in benchmark borrowing costs this year and for most of 2008. The spread of the implied benchmark U.S. interest rate in December 2008 over that in the euro zone widened to around 70 basis points -- the highest since mid-March.

"Investors who had aggressively bet on Fed rate cuts are abandoning ship and now we are in a situation where people are beginning to talk about possible rate hikes," said David Watt, a foreign exchange strategist at RBC Capital in Toronto. "That, combined with a couple of economic reports and some repatriation of funds, is really giving the dollar a boost."

Late afternoon in New York, the euro was down nearly half a percent at $1.3366 after earlier hitting $1.3321, its lowest level since April 4.

Against a basket of major currencies, the dollar hit a two-month high of 82.919 <.DXY>. The dollar was last trading 0.6 percent higher at 121.70 and up 1 percent at 1.2351 Swiss francs .

Declining global equity prices also boosted the greenback, prompting some U.S.-based investors to liquidate overseas stock holdings and take refuge in dollars.

"There's been some dialing down of risk going on, and the dollar has gained from that against most G10 currencies and against currencies such as the Mexican peso," said Dustin Reid, currency strategist at ABN Amro in Chicago.


High-yield currencies continued to gain. The New Zealand dollar rose 1.8 percent to $0.7691 , extending gains booked a day ago when the central bank surprised markets by hiking interest rates to 8 percent. That was the kiwi's biggest one-day rise since September 2006.

The Australian dollar was up 0.5 percent at $0.8440 .

Analysts said that leaves plenty of scope for carry trades in which investors borrow yen at low Japanese interest rates to invest in high-yield assets such as the kiwi dollar.

The Bank of Japan will hold a policy meeting next Friday but is not expected to lift interest rates from their current 0.5 percent, the lowest level in the industrialized world.

"There is a widening choice of high yields to set up long versus the yen," said Alan Ruskin, chief international strategist at RBS Greenwich Capital in Greenwich, Connecticut. "If anything, recent events globally defer the unwind of the yen carry trade."

© Reuters 2007. All rights reserved. Republication or redistribution of Reuters content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Reuters. Reuters and the Reuters sphere logo are registered trademarks and trademarks of the Reuters group of companies around the world.


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