* Dollar rallies, boosted by rising U.S. Treasury yields
* Euro stung by Irish debt problems
* Dollar particularly strong vs yen on US-Japan yield spread
(Updates prices, adds quote)
By Naomi Tajitsu
LONDON, Nov 15 (Reuters) - The dollar index hit a six-week
high on Monday, boosted by a rise in U.S. Treasury yields that
heightened the appeal of U.S. assets, while the euro was stung
as Ireland's debt problems shook confidence in the euro zone.
The 10-year Treasury yield hit a three-month high as the
Wall Street Journal reported that a group of Republican-leaning
economists is launching a campaign calling for the Federal
Reserve to drop its plan to buy $600 billion of Treasuries.
Analysts said the rise in yields gave further reason to buy
the dollar, which has recovered as investors reduce short dollar
positions built up before the Fed's well-flagged decision
earlier this month to begin another bout of quantitative easing.
Investors also sold the euro as Ireland struggled to
convince investors it was in control of its debt problems,
leaving open the possibility of a bailout. []
"There is evidence of stretched positioning - long positions
in U.S. Treasuries and short positions in the U.S. dollar," said
Elsa Lignos, currency strategist at RBC.
"Unlike QE1, which came more out of the blue, the market had
a long time to process QE2 and to factor it in".
The dollar was particularly strong against the yen, rising
to a near 6-week high above 83.00 yen <JPY=>, supported by a
widening in yield spreads between U.S. and Japanese benchmark
government bonds.
The dollar index <.DXY> was 0.5 percent higher on the day at
78.472, having hit a high of 78.562, its strongest since early
October. Its gains came as the euro fell 0.5 percent to $1.3627.
The U.S. currency was boosted as the 10-year Treasury
yield's climb to a three-month high around 2.86 percent
<US10YT=RR> suggested higher returns on U.S. assets.
Yields also rose after Richmond Federal Reserve President
Jeffrey Lacker indicated opposition to the central bank's latest
round of monetary easing. []
"The market still wants to trade the correlation between
yield spreads and the dollar, especially versus the yen," said
Paul Mackel, director of currency strategy at HSBC.
Analysts say the Fed's decision to pump liquidity into the
market through Treasury purchases will limit the upside for
yields, but some say investors may trim long Treasury positions
as a slight recovery in U.S. fundamentals suggests the Fed may
not be as aggressive on QE.
EURO SUFFERS
Mackel at HSBC said higher yields would continue to boost
the dollar. HSBC expects the euro to trade at $1.35 by year-end.
The single currency has taken a hit in the past week or so
as Irish bond yields have rocketed on the country's struggles to
control its spiralling debt.
Still, some investors have taken heart from reports that the
European Union has an aid package of up to 90 billion euros
prepared for Dublin, keeping the euro above Friday's six-week
low of $1.3573.
The euro also had support at its 55-day moving average at
$1.3551, while the dollar index must clear its 55-day average at
78.97 to extend its rally.
The possibility of a bailout lowered the cost of insuring
against an Irish default on Monday, while the spread between
Irish 10-year bond yields and their safer, German counterparts
tightened a touch. []
However, five-year Irish credit default swaps and the
Irish/German yield spread remain near their widest ever,
suggesting that investors have little faith in Ireland's ability
to repay its debts without assistance.
Some analysts were unconvinced a possible rescue plan for
Ireland would offer much support for the euro, given that other
countries including Portugal are also battling debt problems.
(Additional reporting by Jessica Mortimer)
