FOREX-Dollar reverses losses; gains vs euro, yen

* Dollar reverses declines, moves higher after data

* Euro reverses gains with investors wary of EZ debt

* EU summit not seen offering solution to debt crisis

* Spanish bond auction produces solid demand, higher yields
(Recasts; adds quote, details, updates prices)

NEW YORK, Dec 16 (BestGrowthStock) – The dollar reversed earlier
declines to rally against the euro and yen on Thursday amid
rising bond yields after a report unexpectedly showed factory
activity in the U.S. Mid-Atlantic region rose in December.

U.S. Treasury prices posted fresh session lows after the
report suggested an acceleration in economic growth and the
yield on the benchmark 10-year note (US10YT=RR: ) touched a
session high of 3.56 percent, up from 3.52 percent on
Wednesday.
(For the full story on the Philadelphia Fed survey,
double-click on [ID:nEAP105G00])

“The data turned Treasuries around and as U.S. rates backed
up the dollar went with them,” said Brian Dolan, chief
strategist at Forex.com in Bedminster, New Jersey.

The euro dipped 0.1 percent to $1.3196 (EUR=: ) after sliding
more than 1 percent on Wednesday.

The dollar had gained earlier this week as benchmark
10-year Treasury yields hit seven-month highs, pushing the
dollar to a three-month peak against the yen at 84.51 yen
(JPY=: ) on Wednesday. The dollar was up 0.2 percent against the
yen at 84.36 yen on Thursday.

Yields stayed near those seven-month highs on Thursday
after the European Central Bank said it will double its
subscribed capital due to increased market volatility and
credit risk. [ID:nLDE6BF1M4]

Yet investors cautioned that higher bond yields may work
against the dollar in the longer term.

“Who wants to own a Treasury as yields rise?” said Chuck
Butler, president of EverBank World Markets in St. Louis. “It’s
a short-term blip for the dollar.”

While a further rise in U.S. bond yields was seen helping
the dollar for now, some market players noted a breakdown in
the dollar/yen’s correlation with U.S. bond yields and with
U.S.-Japan yield spreads.

“It’s too early to say with conviction, but it could be due
to an emergence of bearish factors, such as the U.S. fiscal
situation,” said Jane Foley, senior currency strategist at
Rabobank.

EU SUMMIT

The euro had been up on Thursday as a European Union summit
to discuss the debt crisis got underway, but investors had
already cautioned the currency was vulnerable to a sell-off on
lingering euro zone peripheral debt concerns.

European leaders sought to paper over deep divisions on how
best to resolve the debt crisis ahead of their summit, but
Spain and Portugal came under renewed pressure to get their
finances in order. [ID:nLDE6BE29I]

Euro zone policymakers are discussing ideas to fall back on
if moves to create a permanent European Stability Mechanism for
solving debt crises fail to calm markets. [ID:nLDE6BE1JV]

While the summit statement is expected on Friday, investors
are looking for any comments that may be made separately by
those attending the meeting.

“They are showing no signs of breaking the impasse,” said
Forex.com’s Dolan. “Germany is resisting the expansion of the
bailout facility and pushing it on the ECB, and as long as that
happens, the final long-term debt default resolution mechanism
is not in sight.”

Traders said liquidity was showing signs of drying up as
the year end was approaching and this was likely to increase
the potential for sharp moves.

The euro hit the day’s highs after results from an auction
of Spanish 10- and 15-year bonds on Thursday, a day after
ratings agency Moody’s said it could downgrade Spain’s ratings.
The auction resulted in higher yields, but solid bid-to-cover
ratios. [ID:nMDT009590]

“Spain is not in a situation where it would have trouble
servicing its debt, so the auction saw enough demand,” said
Lutz Karpowitz, senior currency strategist at Commerzbank in
Frankfurt.

But others added the higher yields indicated continued
wariness about euro zone debt.

Government debt yields for Spain, Portugal and Italy rose
after the Spanish bond auction, highlighting those concerns.
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Euro zone graphic package: http://r.reuters.com/hyb65p

More on euro zone debt: [ID:nLDE6T0MG]
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FOREX-Dollar reverses losses; gains vs euro, yen