NEW YORK | Mon Jun 24, 2013 11:53am EDT
(Reuters) - The dollar rallied against a basket of currencies on Monday, trading near its highest in almost three weeks on rising anticipation that U.S. monetary stimulus will be scaled back in the near term.
The shift in sentiment is prompting more investors to unwind bets that the Fed was not ready to end its bond buying program, known as quantitative easing. The unwinding could take months.
Though the dollar is not up across all pairs, it has been since Federal Reserve Chairman Ben Bernanke said last Wednesday that the U.S. central bank could taper its monthly $85 billion in asset purchases if the economy continues to improve. U.S. bonds and stocks, meanwhile, have sold off since the Fed announcement.
The U.S. dollar swung between gains and losses against the yen, but sold off as the New York session began with investors considering the recent five-day advance had gone too far, too fast.
The dollar earlier rose against the Japanese currency after Bank of Japan Deputy Governor Kikuo Iwata said the central bank still has options for monetary easing, if need be.
The dollar's gains against the euro were tempered by a survey showing a small increase in German business morale, which helped keep the single currency above key chart support.
"These flows reflect the repositioning toward a new Fed reality and begin a new trend for the U.S. dollar," said Camilla Sutton, Chief FX Strategist at Scotiabank in Toronto. "The violence of the market moves should begin to settle in the coming weeks."
The dollar index .DXY was up 0.2 percent at 82.590 after rising as far as 82.841, its highest since June 5. The gains added to last week's 2.2 percent rally, its biggest weekly rise since November 2011.
Bernanke's comments have helped push up the benchmark 10-year U.S. Treasury note's yield to its highest in almost two years on Monday with interest rate differentials moving in favor of the dollar.
The dollar was down 0.3 percent at 97.58 yen, below an earlier peak of 98.70 - its highest since June 11. The strength in the yen against the dollar was seen as spillover as it rose against euro, analysts said.
The euro last traded down 0.5 percent at 127.78 yen.
Changes in the price of the dollar against the yen were mostly in response to moves in European stocks. After investors digested comments from the BOJ's Iwata, the dollar surrendered gains as investors traded on other factors.
Iwata, a vocal advocate of reflationary policies, said that if the Japanese central bank were to boost asset purchases in the future, he would favor government bonds over risky assets, given the size of the vast market for Japanese government bonds, or JGBs.
"The problem the Japanese are having is that talk is not enough," said Joseph Trevisani, chief market strategist at WorldWideMarkets, in Woodcliff Lake, New Jersey. "As the euro goes down against the yen, it is very difficult for the Bank of Japan, with their record, to control."
The euro was last trading down 0.2 percent at $1.3092 after dropping as low as $1.3058, a level not seen since June 5.
Expectations of tighter U.S. monetary policy contrast with a risk of more interest rate cuts in the euro zone and aggressive monetary easing in Japan.
The BOJ stunned financial markets on April 4 by setting in motion an intense burst of monetary stimulus, promising to double its bond holdings in two years and boost purchases of risky assets in an attempt to jolt the economy out of deflation.
Rate differentials between 10-year Treasury notes and similarly-dated German Bunds have moved in favor of the former, with spreads at their highest since April 2010.
Analysts at Morgan Stanley, who recently recommended selling the euro with a target of $1.28, have lowered their entry level for the trade to $1.3180. A break below the 200-day moving average would be a bearish signal, they said.
The 200-day simple moving average is $1.3072, according to Reuters data.
Volume picked up as the New York session began with $3.5 billion in euros changing hands globally with six hours of trading left on Monday, using Reuters Dealing data. Some $2.3 billion in yen traded.
The higher-yielding Australian dollar, which is sensitive to concerns about growth in China, recovered from an earlier 33-month low. The Australian dollar was last up 0.4 percent at $0.9250 after falling as low as $0.9145.
A recent spike in interbank borrowing costs have raised fears that stress in China's banking system could weigh on already slowing growth.
(Reporting by Nick Olivari, editing by G Crosse)