FOREX-Euro hits 3-week high vs dlr as U.S. yields ease

* Euro hits three-week high versus dollar, yen

* Investors see rise in U.S. yields as overdone

* Euro/dollar stalls at key resistance but stops lurk

(Changes dateline, adds quote, detail, previous TOKYO)

By Neal Armstrong

LONDON, Dec 14 (BestGrowthStock) – The euro hit three-week highs
versus the dollar and the yen in thin trade on Tuesday, as
investors took the view that the recent rise in front-end U.S.
yields had gone too far, prompting a squeeze of euro shorts.

Traders said the market was lightening positions ahead of
the Federal Reserve’s policy meeting later on Tuesday.

“The recent rise in front-end U.S. yields looks overdone as
core inflation isn’t going to pick up quickly,” said Gavin
Friend, currency strategist at nabCapital.

“Also euro zone bond spreads seem to have stabilised on the
back of the recent ECB buying which has helped the euro,” he
said.

The European Central Bank stepped up its purchases of
government bonds last week, although the amount was still well
below levels reached last spring.

The dollar’s decline this week has coincided with an abrupt
drop in U.S. Treasury yields and a Moody’s warning that it could
move a step closer to cutting the U.S. triple-A credit rating.

The euro (EUR=: ) rallied to $1.3476 on trading platform EBS,
its highest since Nov. 23, having opened the week in Asia around
$1.3205. It stood at $1.3446, up 0.4 percent on the day, after
being capped by resistance at $1.3475, the 38.2 percent
retracement of the euro’s November decline.

“It looks like it was more a squeeze of positioning than
anything else, particularly in the euro because we know the
market is well short,” a trader at a U.S. investment bank said.

Traders reported stop-loss orders lurking at $1.3490/1.3500,
adding the move looked to be driven by speculators in a thin
year-end market.

The dollar fell broadly, hitting a three-week low versus a
currency basket at 78.952 (.DXY: ). It slipped 0.2 percent to
83.25 yen (JPY=: ) after shedding 0.6 percent on Monday, with
traders seeing decent bids from 83.20 to 83.00.

U.S. YIELDS FALL BEFORE FOMC

Buyers for U.S. bonds emerged after benchmark Treasury
yields surged to six-month highs on Monday. This helped knock
the 10-year yield down to 3.28 percent from 3.39 percent
(US10YT=RR: ).

The yields fell even as Moody’s said that if U.S. President
Barack Obama’s tax and unemployment benefit package became law,
in a plan agreed last week, debt levels could rise, making a
negative outlook on the rating more likely. [ID:nN13105751]

“The dollar is under pressure as Treasury yields,
especially in the medium-term zone, have dropped quite
significantly ahead of the FOMC meeting,” said Gen Kawabe,
manager at Chuo Mitsui Trust and Banking.

The Federal Reserve policy board meets later on Tuesday and
is expected to reaffirm its quantitative easing policy while
acknowledging the recent better run of data. [ID:nFEDAHEAD]

“The Fed will continue ploughing on with its QE stance. It
won’t divert from its intention to buy $600 billion in
government debt until next spring at least,” said Friend at
nabCapital.

The Australian dollar was at $0.9973 (AUD=D4: ), near a
one-month high of $0.9983 hit on Monday.

The Aussie rose above NZ$1.3250 for the first time since
late 2000, with the kiwi dollar coming under pressure after New
Zealand retail sales fell in October, leading the market to
further push out the timing of any hike in interest rates.

(Additional reporting by Ian Chua and Hideyuki Sano)

FOREX-Euro hits 3-week high vs dlr as U.S. yields ease