March 14, 2012 / 8:38 PM / 6 years ago

FOREX-Dollar jumps vs euro and yen on yields, Fed stance

* Dollar hits 11-month high vs yen
    * Brighter Fed outlook reduces expectations of more easing

    By Julie Haviv	
    NEW YORK, March 14 (Reuters) - The dollar leaped to an
11-month high against the yen and a one-month peak versus the
euro on Wednesday a day after the Federal Reserve
upgraded its economic outlook amid a stream of U.S. data
signaling a sustainable recovery.	
    Rising Treasury yields drove dollar/yen strength, with the
greenback notching its strongest two-day performance in four
months. The two-year Treasury note yield hit its highest since
July 29, making the dollar more attractive as a
buy-and-hold asset instead of as a currency to fund investments
in higher-yielding assets elsewhere.	
    The dollar rose as high as 83.83 yen, its highest
since mid-April last year. Traders said Japanese exporters were
reluctant to sell the dollar and anticipated further strength.
The dollar has advanced nearly 9 percent against the yen in 2012
to date, and analysts are raising their forecasts.	
    The dollar is on path for a sixth straight weekly gain
against the yen, with its trajectory linked to last month's
monetary easing steps by the Bank of Japan and Japan's record
trading deficit. 	
    While the Bank of Japan this week did not follow up last
month's surprise policy easing, the market sees the door to
further growth-supportive moves by the Bank of Japan as being
wide open, according to Omer Esiner, chief market analyst at
Commonwealth Foreign Exchange in Washington.	
    "The widening spread of U.S. yields over their Japanese
counterparts remains a key driver of the dollar's strength."	
    The dollar was last at 83.74 yen, up 1 percent on the day
and following a 0.8 percent gain on Tuesday, its best two-day
performance since early November after intervention by the BoJ.	
    "We have revised our dollar/yen forecast up to 90 in six
months and think it will stay there until 12 months from now,"
said Raghav Subbarao, currency strategist at Barclays Capital in
    Barclays' previous forecasts were for dollar/yen to be at 82
yen in six months and 84 yen in a year.	
    The improving outlook for the U.S. economy, driving
expectations that the Fed will be less likely to launch another
round of bond-buying, is in marked contrast to the euro zone and
Japan, where struggling economies make further easing by the
European Central Bank and more Bank of Japan action more likely.	
    While the rally in USD/JPY is about rising yields, the fall
in EUR/USD is as much about the rally in U.S. bank stocks and
rate expectations, according to Adam Cole, global head of FX
strategy at RBC Capital Markets in London.	
    The euro fell to a one-month low of $1.3008 after
triggering stop-loss orders below support at $1.3054, around the
50 percent retracement of a Jan. 16-Feb. 24 rally. It was last
at $1.3024, down 0.4 percent for the day.	
    Further support for the euro loomed at the next major trough
on daily charts at the Feb. 16 low of $1.2973.	
    The Fed's policy-setting Federal Open Market Committee on
Tuesday slightly upgraded its economic outlook. {ID:nL2E8ECBGD]	
    Further boosting dollar sentiment was the Fed's announcement
on Tuesday that most of the largest U.S. banks passed its stress
tests, a key measure of the health of the country's banks,
bolstering strong gains on most stock exchanges. 	
    "We suspect that EUR/USD could continue to follow closely
the tightening German-U.S. bond yield spread," said Valentin
Marinov, currency strategist at CitiFX, a division of Citigroup,
in London. "Deep and protracted recession in the euro zone seems
likely to keep the ECB in an accommodative mode for now."	
    "At the same time, the nascent recovery in the U.S. seems to
have muted to a degree the Fed's urge to accommodate further."	
    The euro zone common currency strengthened against the Swiss
franc, however, rising to a peak of 1.2146 francs, its
highest since Jan. 10, ahead of a Swiss National Bank rate
decision on Thursday. 	
    Although economists polled by Reuters expect the SNB to
stick to its euro/Swiss floor at 1.20 francs and keep interest
rates at zero, there have been calls for the bank to raise the
floor. The euro was last up 0.4 percent at 1.2124 francs.

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