Dollar tumbles to 3-1/2-month low vs yen as yields fall

20/05/2014 07:48 AST

NEW YORK: The dollar fell to its lowest in more than three months against the yen on Monday, pressured by a drop in US Treasury yields that may be due to persistent uncertainty about US economic growth prospects.

Mixed economic data and a generally dovish outlook from the Federal Reserve have weighed on US bond yields, consequently tempering the dollar's ability to sustain meaningful gains this year.

"US yields are still the main story," said Vassili Serebriakov, currency strategist, at BNP Paribas in New York. "The general feeling seems to be that the market is still vulnerable to the downside in terms of yields."

The dollar/yen pair is the most vulnerable to movements in US yields because it is where the market holds the largest long positions on the greenback.

Benchmark US 10-year yields fell to 2.51 percent on Monday from 2.52 percent late on Friday. Yields have fallen in four of the last five sessions and last Thursday, they tumbled to six-month lows.

The dollar fell as low as 101.11 yen, the weakest since early February. It was last at 101.18, down 0.3 percent. The greenback's break below 101.20 yen was the first time since November that it has traded lower than its 200-day moving average, which was at 101.17 yen.

It has been a choppy period for currency markets, hamstrung this year by a lack of clear differentiation between the economic stories of Japan, Europe and the United States.

Growth is now moving at different rates, although official borrowing costs in all three remain near rock bottom. Signs the European Central Bank is preparing to loosen monetary conditions even further knocked the euro back last week.

The single currency gained 0.2 percent on Monday to $1.3720 after a volatile session on Friday.

BNP's Serebriakov said the euro's strength was just a result of the dollar's broad weakness. "I don't think anybody wants to buy the euro at this point."

Analysts from Credit Agricole said the euro's resistance to further losses at the end of last week raised prospects it may head higher.

"This week's focus will be on PMI releases, which we expect to confirm a trend of further improving growth conditions," they said in a morning note.

"Under such conditions, position squaring-related EUR upside cannot be excluded. We advise against selling the single currency around the current levels. From a broader angle, however, we expect rallies to remain a sell."

The dollar index stood at 79.971, down slightly on the day after notching up a modest 0.2 percent gain last week, when it touched a six-week peak of 80.338 on Thursday.

Investors also await minutes later this week of the Federal Reserve's April 29-30 policy meeting, as well as a private survey on China's manufacturing sector for May.

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