August 16, 2013 / 6:24 AM / 5 years ago

Dollar firmer as U.S. 10-year bond yields near two-year high

LONDON (Reuters) - The dollar rose against a basket of currencies on Friday, drawing support from a rise in U.S. Treasury yields on expectations that the Federal Reserve may start withdrawing stimulus next month.

A picture illustration shows U.S. 100 dollar bank notes taken in Tokyo August 2, 2011. REUTERS/Yuriko Nakao

Ten-year Treasury yields rose to their highest in two years, while the gap between two-year Treasury yields and their Japanese counterpart rose to its highest in five weeks, Reuters data showed.

The dollar index .DXY rose 0.15 percent to 81.30. The dollar was up 0.3 percent against the yen at 97.65 yen, while the euro was slightly lower on the day at $1.3330.

“Given that the 10-year U.S. yields are headed towards 3 percent we think the general direction is for a stronger dollar,” said Tom Levinson, FX strategist at ING. “The dollar index has underperformed the rise in yields so there is a fair bit of catch-up to do.”

The yield on the benchmark 10-year Treasury note edged up to 2.78 percent in the European session from its U.S. close of 2.76 percent on Thursday, when it hit a two-year high of 2.823 percent.

Later in the day, U.S. housing starts for July and the University of Michigan confidence index could set the tone for bond markets and to a large extent the dollar, traders said.

Even though the euro zone is returning to growth, the European Central Bank looks unlikely to change benchmark interest rates any time soon. In the United States, good domestic data has bolstered expectations that monetary policy may not remain ultra-loose for long.

On Thursday, upbeat U.S. jobless claims data initially spurred a rally in the dollar but then disappointing data on industrial output and manufacturing set the stage for its reversal.

“This is a tough market for speculators. It’s big on volatility, but no clear trends,” said Masashi Murata, senior currency strategist at Brown Brothers Harriman in Tokyo.

“The market seems to have priced in tapering this September, and that’s why U.S. Treasury yields went up to around 2.8 percent, so that should be supporting the dollar/yen,” he said.

More recent data shows that Japanese investors turned to net buying of foreign debt, much of which was likely to have been Treasuries.

New Zealand’s dollar skidded after a strong earthquake struck near the country’s capital of Wellington on Friday.

The kiwi dropped as low as $0.8053, from a two-month peak of $0.8113 minutes before the quake hit. It later recovered to buy $0.8079, still down 0.1 percent on the day.

Additional reporting by Lisa Twaronite in Tokyo; editing by Tom Pfeiffer

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