FOREX-Yields help dollar rise vs yen; euro rebounds

* Interest rate differential boosts dollar vs yen

* Trichet’s comments highlight chances of ECB rate hike

* Dollar still vulnerable; market misreading Fed comments
(Recasts throughout, adds comment, detail; changes byline)

By Steven C. Johnson

NEW YORK, March 28 (Reuters) – The dollar gained on the yen
on Monday as the gap between U.S. and Japanese yields widened
in the greenback’s favor, but the greenback may be vulnerable
to renewed selling, especially if forthcoming U.S. jobs data
disappoints.

The two-year U.S. Treasury yield rose to 0.77 percent, four
basis points above Friday’s close and up 14 basis points in
five days, widening its gap over comparable Japanese yields.

That helped push the dollar to a session peak of 81.84 yen
(JPY=: Quote, Profile, Research), its highest since March 18, when the Bank of Japan and
other major central banks intervened to stop runaway yen
gains.

Meanwhile, the euro held above $1.40 (EUR=: Quote, Profile, Research) as markets
braced for higher euro zone interest rates.

Some upward pressure on the dollar and U.S. yields was
sparked by the Philadelphia Federal Reserve president, who on
Friday said the central bank would have to tighten policy soon
to avoid inflation.

But analysts said the market overreacted to the comments
from the Fed’s Charles Plosser, a traditional policy hawk, and
noted that recent U.S. economic data, particularly regarding
the housing market, has shown signs of weakness.

While the Commerce Department on Monday said consumer
spending rose more than expected in February, its eighth
consecutive monthly gain, higher gas and food prices are
expected to slow spending growth in the first quarter.
[ID:nCAT005399]

“On balance and at the margin, the evidence is tilted in
the direction of a weak economy and no need for Fed concern
about changing its easy policy any time soon,” said Dan Dorrow,
head of research at Faros Trading in Stamford, Connecticut.
“Recent market pricing to the contrary is an overreaction.”

U.S. employment data is due on Friday, and economists
polled by Reuters expect 190,000 job gain in March, steady with
the 192,000 jobs added the prior month.

EURO HOLDS FIRM

Marc Chandler, global head of currency strategy at Brown
Brothers Harriman, said the euro was flashing similar signals.
While it fell Friday and hit a one-week low near $1.40
overnight, it was last up 0.1 percent at $1.4096 (EUR=: Quote, Profile, Research).

That was well within an uptrend that persisted through last
week’s credit downgrade of Portugal and expectations that it
could soon become the third indebted euro zone country to
require emergency aid.

The market expects the European Central Bank to lift
interest rates on April 7, a view that gained credence Monday
when ECB President Jean-Claude Trichet said inflation rates are
above the central bank’s price stability target.[nWEA1186].

Chandler said the euro gains may falter after an ECB rate
hike, partly on the view that the euro zone economy is too
fragile to withstand a series of interest rate hikes.

“But if we’re going to see a ‘buy-the-rumor, sell-the-fact’
reaction, we still have to wait for the fact,” he said. “April
7 is far away for the foreign exchange world, and you could see
the euro push up another couple of big figures before then.”

The possibility of higher interest rates as early as next
month softened concerns about Germany’s ruling party losing a
key state election.

YEN APPRECIATION A RISK

The dollar may also drift back toward 80 yen in the near
term, said Fabian Eliasson, vice president of currency sales at
Mizuho Corporate Bank, particularly if Japanese investors
repatriate funds ahead of month end on Thursday.

One-month dollar/yen volatility traded around 10 percent
(JPY1MO=: Quote, Profile, Research), compared with around 20 percent when the yen rose
to a record high of 76.25 earlier this month.

Should volatility pick up and yen gains accelerate, though,
the G7 could step in again to weaken it, Eliasson said.

“I don’t think the BoJ has a specific level in mind,” he
said. “Theirs is more of a defensive strategy aimed at keeping
any further appreciation from getting too rapid.”

Japan and other Group of Seven countries joined forces to
stem yen appreciation earlier this month after it hit a record
high near 76 per dollar.
(Additional reporting by Julie Haviv; Editing by Dan Grebler)

FOREX-Yields help dollar rise vs yen; euro rebounds