Dollar trades near 3-week high on widening yield advantage

Monday, May 9, 2005 | 9:49 a.m.

The dollar traded near a three-week high against the euro in Europe as the extra yield U.S. Treasuries offer over European counterparts lured investors.

The dollar has risen 5.9 percent against the euro this year and 2.6 percent versus the yen on speculation signs of growth will drive up borrowing costs. Interest-rate futures contracts show traders increased bets on the number of times the Federal Reserve will raise interest rates this year after a government report on May 6 showed the U.S. added more jobs than expected.

"The dollar looks ready to move up," said Luke Waddington, head of trading and interbank currency sales in Tokyo at Royal Bank of Scotland Plc. "Non-farm payrolls were strong, the Fed's going to keep raising rates and yields are favoring the dollar."

The dollar was at $1.2818 per euro at 7:20 a.m. in London and traded as high as $1.2790, the strongest since April 15, from $1.2819 late on May 6 in New York, according to electronic currency-dealing system EBS. It was also at 105.28 yen, from 105.06. The U.S. currency may rise to $1.27 in the next two days, Waddington said.

The yen also may decline after a week-long national holiday in China ended without a change in the country's fixed-exchange rate to the dollar. Japan's currency on May 4 rose to a seven-week high on speculation China would allow the yuan to climb, reducing its export competitiveness and boosting its consumers' buying power.

China's yuan was unchanged in a special trading session yesterday, reducing speculation of an imminent revaluation.

"Nothing happened to the yuan yesterday, so that's dashed some hopes of immediate action by China," said Toru Umemoto, chief currency strategist in Tokyo at Barclays Plc. "That and the combination of the strong payrolls number out of the U.S. will hurt the yen against the dollar."

The yen may decline to 107 this week, he said.

Yield Gap

Fifty-five percent of the 58 strategists, investors and traders polled on May 6 from Sydney to New York said to buy the dollar against the euro, up from 51 percent in the prior week.

U.S. employers added 274,000 workers, the Labor Department said, up from 146,000 in March, and more than the 174,000 median forecast in a Bloomberg survey. The report suggests the economy is growing at a faster rate after slowing last quarter.

The gap, or spread, between two-year U.S. Treasury note yields and like-maturity German debt is the widest since 2000.

'In The Way'

Any advance in the dollar may be limited by speculation a government report on May 11 will show the U.S. trade gap widened to a record in March.

The U.S. deficit, the amount by which imports exceed exports, increased to $61.7 billion from a record $60 billion in February, according to the median forecast of 52 economists surveyed by Bloomberg News. The dollar had its biggest weekly decline against the euro in almost three months after the January deficit widened more than expected.

Investors "will be reminded of the massive deficits in the U.S.," said Callum Henderson, head of global currency strategy at Standard Chartered Plc in Singapore. "That's the one thing standing in the dollar's way this week."

Futures traders increased bets the Fed will raise its benchmark rate to at least 3.75 percent by year-end. The yield on December Eurodollar futures contracts was 4.02 percent, from 3.82 percent on May 5, the day before the labor market report was released. The futures settle at a three-month lending rate that has averaged 21 basis points above the central bank's target over the past 10 years.

'Much Better'

A government report on May 12 will show U.S. retail sales rose 0.7 percent in April, following a 0.3 percent increase in March, based on the median estimate in a Bloomberg survey.

"The retail report will support the dollar," said Katsunori Kitakura, manager of Treasuries in Tokyo at Chuo Mitsui Trust and Banking Co. "The numbers we're seeing from the U.S. are much better than in Europe or Japan."

The dollar may rise to 107 yen and $1.25 per euro in the next few weeks, he said.

The Fed on May 3 lifted its target rate for overnight loans between banks for an eighth straight time by a quarter point to 3 percent. A day later, the European Central Bank decided to keep its benchmark rate at 2 percent, the level it's been at since 2003. The Bank of Japan on April 28 kept borrowing costs near zero as it has since March 2001.

In other trading, the dollar was at 1.2069 Swiss francs, from 1.2069 francs. The British pound was at $1.8867, from $1.8902.

--Editors: Hosoda, Harvey, Grose-Hodge, Barrett.

To contact the reporter on this story: John Brinsley in Tokyo at (813) 3201-3521 or jbrinsleybloomberg.net

To contact the editors responsible for this story: Beth Thomas at (81) (3) 3201-3466 or bthomas1bloomberg.net Dan Moss at (44)(20) 7330-7719 or at dmossbloomberg.net

-0- May/09/2005 7:22 GMT