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Dollar takes a pause from rally, but outlook robust - (Reuters)

Posted by Chris Advincula on Jun 21, 2013 6:13:00 AM

June 21 Friday 10:30 GMT


By Anirban Nag

LONDON, June 21 (Reuters) - The dollar slipped from a two-week high against a basket of major currencies on Friday but was still on track for its best weekly rise in a year on expectations of an eventual end to ultra-loose U.S. monetary policy.

After two straight days of sharp gains, some speculators booked profits on the dollar's rise. That helped the euro to recover from a two-week low struck on Thursday.

But gains in the euro are unlikely to last as interest rate differentials are moving in favour of the dollar. Also, a rise in bond yields in southern European countries, given a global bond market sell-off, is compounding the euro zone's problems.

Against the currency basket the dollar stood at 81.917 , below Thursday's two-week high of 82.145, though it was still up 1.6 percent for the week.

The euro was steady at $1.3215, but well below Wednesday's four-month peak of $1.3414. Traders said with the yield gap between 10-year Treasuries and German Bunds rising to its highest since late April 2010 in favour of the former, most investors were looking to initiate fresh bets against the euro.

The last time spreads between U.S. Treasures and benchmark German Bunds were at that level over three years back, the euro started to fall from a high of above $1.34 to below $1.20.

The dollar gained 0.6 percent against the yen to 97.85 yen , edging near its 98.29 yen top hit on Thursday.

"Among G-10 currencies, we see the dollar as the most popular," said Yujiro Goto, FX strategist at Nomura. "Demand from Japanese investors for Treasuries will pick up and we are expecting the U.S. economy to keep growing. The Fed is likely to start tapering (stimulus measures) in September and this is very encouraging for dollar/yen."



There are concerns, however, that higher U.S. interest rates could prompt a stampede out of emerging markets. Such a development could favour traditional safe-haven currencies such as the yen and the Swiss franc, traders said.

Yields on 10-year U.S. Treasuries rose to their highest since August 2011 after Fed Chairman Ben Bernanke said on Wednesday the economy was improving enough for the Fed to begin scaling back its monthly $85 billion in asset purchases.

"It's become clear the Fed is heading for an exit from stimulus. The era of 'Bernanke puts' is over. Those who are doing dollar carry trades and buying emerging market assets have to unwind their positions," said Mitsuru Saito, chief economist at Tokai Tokyo Securities.

Investors were also keeping an eye on turmoil in Chinese money markets, but fears of a broader banking crisis eased on speculation the central bank had quietly added funds.

That helped to lift the growth-linked Australian dollar from a 33-month low hit on Thursday. The Aussie rose 0.5 percent to $0.9270, after having sunk to $0.9163 on Thursday.



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