Dollar keeps rising on U.S. economic optimism, higher yields
The dollar hit a fresh 11-month high against the yen and a one-month peak against the euro in Asia on Thursday, supported by growing optimism about the U.S. economy and subsequent rises in U.S. bond yields.
The dollar's strength came as other currencies suffered their own problems, with the euro shackled by worries over debt, the yen hampered by speculation of more Bank of Japan easing and the Aussie dollar hurt by worries about growth in China.
"Don't think of this as risk-on bets on the global economy. The market has just reviewed its view on the U.S. economy, scaling back expectations of QE3 by the Fed or the view that the U.S. economy will be doing poorly this year," said Makoto Noji, senior strategist at SMBC Nikko Securities.
The U.S. unit gained against all other major currencies, with its index against a basket of major currencies hitting its highest in two months at 80.738 .DXY. It last stood at 80.67.
"The U.S. recovery is starting to gain some traction," said Annette Beacher, head of Asia-Pacific research at TD Securities in Singapore.
Hot on the heels of last week's encouraging U.S. jobs report, a strong 1.1 percent rise in retail sales in February provided fresh evidence of an upturn in the world's largest economy.
Earlier, the U.S. Federal Reserve Bank slightly upgraded its outlook, expecting "moderate" growth over coming quarters and a gradual decline in the unemployment rate.
"All the dots are lining up for U.S. data at the moment and markets still digesting the fact that (Fed Chief) Bernanke has dropped the word 'strain' in terms of financial markets (in his last statement)," said Beacher.
This has led the markets to lower their expectations of further quantitative easing and given a boost to the dollar.
The two-year Treasury note yield hit its highest since July, lessening the attraction of using the dollar to fund carry trades and pushing the yen to lows not seen since April.
The dollar rose to as high as 84.187 yen before stabilizing at around 84.08 yen, up 0.4 percent on the day after having risen nearly 1 percent the previous day.
The British pound also hit nine-month high of 131.46 yen.
The latest dollar-buying is driven in part by purchasing from option traders who have sold dollar calls as well as from Japanese investors who are reducing currency hedging on their U.S. bond investments, traders said.
Resistance is at the psychological level of 85 yen, last seen 11 months ago, though many market players are now seeing an increasing chance of the dollar rising beyond last year's high of 85.53 yen.
Data from the U.S. government has shown speculators have been selling the yen aggressively since the Bank of Japan's easing in February, switching to net yen short position of around 20,000 contracts from around net long position of more than 50,000 contracts before the BOJ's action.
"Historically their net yen short positions tend to peak around 50,000 contracts, so there may be further selling of around 30,000 contracts. As the dollar rose about seven yen as they sold 70,000 contracts, roughly one yen per 10,000 contracts, the dollar could rise by another three yen," said an analyst at a major Japanese financial institution.
The euro fell to a one-month low of $1.3004 after triggering stop-loss orders below support at $1.3054, around the 50 percent retracement of a January 16-February 24 rally, though bids just above $1.3000 are supporting the euro for now.
Further support for the euro loomed at $1.2973, the next major trough of February 16.
The Australian dollar hit an eight-week low of $1.0424, taking the brunt of a sharp fall in Shanghai shares since Wednesday after Chinese Premier Wen Jiabao doused hopes of easing in the property sector.
The Norwegian crown, one of the best performing currencies earlier this year, dropped to a one-month trough against both the euro and dollar after its central bank unexpectedly cut interest rates on Wednesday to rein in its racy currency.
The Swiss franc was also under pressure ahead of the Swiss National Bank (SNB) policy decision at 0830 GMT on Thursday.
It fell to its lowest since January on speculation the SNB may raise the floor under the EUR/CHF from 1.20 Swiss francs. The euro was last at 1.2125 francs, near Wednesday's high of 1.2147 franc.
Implied volatilities on the euro/Swiss have also jumped with one-week volatility rising to around 5.0 percent from around 2.0 percent earlier this week.