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FOREX-Dollar Hits Five-Month Highs Against The Yen As US Yields Rise On Inflation

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* The dollar returns against low yielding currencies

* Yen close to four-month low as US bond yields rise

* Risk sensitive currencies supported

* Chart: Global exchange rates https://tmsnrt.rs/2RBWI5E

By Ritvik Carvalho

LONDON, Feb. 17 (Reuters) – The dollar appreciated against low-yielding currencies on Wednesday, hitting a five-month high against the yen, as US bond yields surged on prospects of another recovery economy and possible acceleration of inflation.

Bitcoin set a record high of $ 51,300, a day after the cryptocurrency first rose to $ 50,000. This brought its total market capitalization to over $ 900 billion, with traders betting on its increased acceptance by big companies.

The dollar index against six other major currencies fell from Tuesday’s three-week low at 90.117 to last position at 90.739.

Soaring US bond yields boosted the dollar, with the 10-year yield hitting 1.333% from around 1.20% at the end of last week.

“The liquidation of US Treasuries is the main driver of FX at the moment, with the dollar inevitably finding support, and not just against the usual victim, the JPY (USD / JPY has the highest correlation in FX with US 10-year yields), as commodity currencies are actually being the hardest hit, ”said Francesco Pesole, G10FX strategist at ING.

“As the bond market doubles on stimulus bets, other assets are not showing signs of optimistic risk. The risk is that the US rate hike has accelerated to such a rate that it is starting to be self-defeating and to cause a correction of risky assets. “

The yen, which is sensitive to US yields, reacted the most with the dollar jumping to 106.225 yen on Asiantrade, its highest since September, before falling to 105.89 yen.

“I think the dollar’s downtrend is over. At the start of the year, speculators were betting on the dollar falling below 100 yen. They seem to have abandoned such a view now,” said YukioIshizuki, senior strategist at Daiwa Securities.

The story continues

A sign of declining bets on the dollar’s fall against them is apparent in the options market. Short-term dollar calloptions, or dollar bets, have become more expensive than dollar puts, bets against currency.

The one-week risk reversal spread is now favorable to dollar calls for the first time in nearly five years.

“If we think that US yields will rise further, we might look more favorable to the dollar,” said Jun Arachi, senior currency strategist at Rakuten Securities.

“I would say this trade could continue until BidenAdministration’s stimulus package kicks in, maybe in March, when people could start to unwind their bets to ‘sell on the facts.’

Biden has tried to build public support for his $ 1.9 trillion coronavirus relief plan at a town hall.

The euro slipped to $ 1.2075, although its fall was less pronounced after its gains earlier Tuesday following strong data on German economic sentiment.

The New York Federal Reserve’s Empire State manufacturing report released Tuesday offered a bullish economic picture, with a rise in its “prices paid index” fueling concern over faster inflation.

This optimism was echoed by St. Louis Fed Chairman JamesBullard, who told CNBC that financial conditions in the United States were “generally good” and that inflation is likely to heat up this year.

However, San Francisco Fed Chairman Mary Daly said pressures on inflation were still on the downside, prompting critics warning that low interest rates and government spending could overheat the US economy. and trigger high inflation.

“His comments do not resonate with market participants concerned about inflation at this point,” said Ishizuki of Daiwa.

The positive mood on the economic outlook underlies risk-sensitive currencies.

The British pound remained firm at $ 1.3895, after hitting its highest level since April 2018 on Tuesday. Against the euro, the pound was trading at its highest level since the start of May at 86.84 pence to the euro.

The Australian dollar gained 0.2% to $ 0.7764, notably from Tuesday’s one-month high of $ 0.7805.

The offshore Chinese yuan fell back to 6.4359 per dollar after hitting a two-and-a-half-year high at 6.4010 earlier in the week.

(Reporting by Ritvik Carvalho; additional reporting by HideyukiSano in Tokyo; editing by Larry King)

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