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




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.
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.