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Dollar boosted by higher Treasury yields

LONDON - The dollar index hit a six-week high on Monday, boosted by higher US Treasury yields, while the euro was stung as Ireland’s deepening debt problems shook confidence in the euro zone.

The 10-year Treasury yield hit a two-month high as the Wall Street Journal reported that a group of Republican-leaning economists is launching a campaign calling for the Federal Reserve to drop its plan to buy $600 billion of Treasuries.

That prompted more short-covering in the dollar, which had been sold aggressively as investors bet the Fed would print hundreds of billions of dollars to shore up the economy.

Analysts believe the Federal Reserve’s recent announcement to implement more quantitative easing will limit upside for Treasury yields, but they added that speculators saw higher yields as a green light to buy the dollar.

“There’s definitely a limited upside to US yields given QE, but their rise has contributed to a higher dollar,” said Carl Hammer, chief currency strategist at SEB in Stockholm.

The euro hovered near a six-week low hit late last week, having taken a hit as Irish bond yields have rocketed on the country’s struggles to control its spiralling debt.

Dublin has not applied for EU debt assistance yet, but it has not ruled out doing so. This has threatened to plunge the entire euro zone into another crisis of confidence.

Still, some investors have taken heart from reports that the European Union has an aid package of up to 90 billion euros prepared for Dublin, which has helped stem a flight-to-quality rally in Treasuries, pushing yields higher.

The dollar index, which tracks the dollar’s value against a currency basket, rose roughly half a percent on the day to 78.513, its highest in roughly six weeks.

More euro losses?

By 0901 GMT, the euro had fallen 0.4 percent to the day’s low around $1.3620.

It hovered near the $1.3573 it hit on Friday, its lowest since late September. Some analysts were unconvinced a possible rescue plan for Ireland would offer much support for the euro, given that other countries including Portugal are also battling debt problems.

“EUR/USD found some support on rumours of an Irish rescue deal ... but there is still sufficient risk to discourage an immediate return to long EUR positions,” ING analysts said in a note.

UBS analysts said the euro was vulnerable to more losses if Ireland does not accept EU funding this week, adding the single currency would likely be sold on rallies in the short term.

The US currency was boosted across the board as the 10-year Treasury yield’s climb to a two-month high around 2.84 percent suggested higher returns on US assets.

Yields rose also as Richmond Federal Reserve President Jeffrey Lacker indicated opposition to the central bank’s latest round of monetary easing.

The dollar rose 0.5 percent to 82.92 yen, while it also gained versus the Australian and New Zealand currencies.