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Euro hits 3-week high vs dlr as U.S. yields ease

LONDON - The euro hit three-week highs versus the dollar and the yen in thin trade on Tuesday, as investors took the view that a recent rise in front-end U.S. yields had gone too far, prompting a squeeze of euro shorts.

Traders said the market was lightening positions ahead of a U.S. Federal Reserve policy meeting later on Tuesday.

“The recent rise in front-end U.S. yields looks overdone as core inflation isn’t going to pick up quickly,” said Gavin Friend, currency strategist at nabCapital.

“Also euro zone bond spreads seem to have stabilised on the back of the recent ECB buying which has helped the euro,” he said.

The European Central Bank stepped up its purchases of government bonds last week, although the amount bought was still well below levels reached last spring.

The dollar’s decline this week has coincided with a pullback in U.S. Treasury yields and a Moody’s warning that it could move a step closer to cutting the U.S. triple-A credit rating.

The euro rallied to $1.3498, up 0.7 percent on the day, its highest since Nov. 23, having opened the week in Asia around $1.3205. It broke above key resistance at $1.3475, the 38.2 percent retracement of the euro’s November decline.

The euro also rose to a three-week high at 112.19 yen.

The single currency shrugged off a weaker-than-forecast German ZEW current conditions survey.

Traders reported euro/dollar stop-loss orders lurking at $1.3500, adding the rally looked to be driven by speculators in a thin year-end market.

“The moves this week have done enough already to scare off real money and encourage the intra-day hot money. As a result the order board is once again dominated by short-term stops,” a London-based spot trader said.

The dollar fell broadly, hitting a three-week low versus a currency basket at 78.819. It slipped 0.5 percent to 82.95 yen after eroding demand at 83.00.

U.S. YIELDS FALL BEFORE FOMC

Buyers for U.S. bonds emerged after benchmark Treasury yields surged to six-month highs on Monday. This helped knock the 10-year yield down to 3.28 percent from 3.39 percent.

The yields fell even as Moody’s said that if U.S. President Barack Obama’s tax and unemployment benefit package became law, in a plan agreed last week, debt levels could rise, making a negative outlook on the rating more likely.

The Federal Reserve policy board was expected to reaffirm its quantitative easing policy while acknowledging the recent better run of data.

“The Fed will continue ploughing on with its QE stance. It won’t divert from its intention to buy $600 billion in government debt until next spring at least,” said Friend at nabCapital.

The Australian dollar rose to a one-month high to touch parity with the U.S. dollar, boosted by a firmer gold price and strong buying by a UK bank.