* Intraday bias on dollar/yen turns higher
* Demand for dollar/yen vols pick up
* Sterling rises on rate hike expectations
(Updates prices, adds correlation ratio, options trading)
By Gertrude Chavez-Dreyfuss
NEW YORK, Feb 15 (Reuters) - The dollar climbed against the
yen to its highest in eight weeks on Tuesday, boosted by the
recent rise in U.S. Treasury yields, with more gains seen
likely if bond markets continue to factor in inflation.
The greenback has gained against the yen in nine of the
past 10 sessions, rising more than 2 percent this month.
Analysts at Action Forex said Tuesday's rise in the currency
pair signified that the rebound from 80.93 yen, the Jan. 3 low,
has resumed and intraday bias has shifted to the upside.
Further rallies in dollar/yen should target the 84.51 yen
resistance, the high on Dec. 15. On the downside, analysts said
a break of Monday's 83.09 low is required to signal a
short-term peak. Otherwise, the outlook remains bullish, Action
Forex said.
Two-year Treasury yields have risen more than 20 basis
points since Feb. 1, while benchmark rates have edged up by
more than 17 basis points, seemingly driven by inflation
expectations amid an improving U.S. economy. That has increased
the appeal of dollar assets, especially against another
low-yielding currency such as the yen.
"The relationship between dollar/yen and U.S. yields has
come back into play," said Paresh Upadhyaya, head of Americas
G10 FX strategy at Bank of America Merrill Lynch in New York.
Dollar/yen is the currency pair most sensitive to movements
in bond yields because both units are competing as the markets'
favored funding unit. Any shift in the yield curve or rate
expectations should have an impact on both currencies.
To see an analysis of market inflation expectations
double-click on [].
Upadhyaya said the correlation between two-year yields and
dollar/yen broke down in December, but has come back in late
January and February and has underpinned dollar/yen.
On Tuesday, the correlation between dollar/yen and
benchmark 10-year yields were at a robust 70 percent, according
to Reuters data.
The return of that correlation, Upadhyaya noted, was partly
precipitated by news from China on Tuesday showing new yuan
loans, money supply and headline consumer prices were better
than expected. []
"That reduces expectations in the market that China may
have to tighten more aggressively ... diminishing risk aversion
and spurring some selling in the yen" as a a funder of risk
assets, Upadhyaya said.
In late afternoon trading, the dollar rose 0.6 percent
versus the yen to 83.76, hitting an eight-week high at 83.93
yen <JPY=EBS>.
Traders said there has been good interest to buy dollar/yen
volatility in the options market the past week as the front end
of the curve, specifically three-month vols, which has recently
declined to its lowest in more than 3 years. That suggested
dollar/yen could see some movement in its price the next few
weeks, having been rangebound so far this year.
Three-month vols fell on Tuesday to 10.00 percent <JPY3MO=>
after posting gains the last two days.
At the same time, the euro outperformed the dollar for the
first time in four days on Tuesday, bouncing from a three-week
low. But the gains could be fleeting as technical factors point
to losses.
The euro rose above $1.35 and traded off a 3-week low of
$1.3428 on Monday. The euro <EUR=> was last little changed
against the dollar at $1.3488.
Scotia Capital's chief currency strategist Camilla Sutton
said near-term technicals are warning of the potential for
further downside for the euro and suggest a test down to
$1.3425 is likely.
The euro faces obstacles from several directions, with
sovereign debt risk and interest rate differentials working
decidedly against the euro zone single currency.
Europe moved closer on Tuesday to a deal on tackling its
debt crisis, but time is tight to agree on a comprehensive
package by the end of March and officials announced extra
meetings to boost chances of reaching an accord.
[]
Sterling <GBP=> rallied 0.6 percent against the dollar to
$1.6128 after data showed for the thirteenth consecutive month
the UK's inflation rate is above the upper target of the Bank
of England. This fueled speculation rates will rise in the near
term as the BoE seeks to contain price pressures.
(Additional reporting by Julie Haviv; Editing by James
Dalgleish)
