* Dollar rises as U.S. 10-year yields hit 3-month high
* Euro stung by Irish debt problems
* Market trades on dollar's correlation with yield spreads
(Recasts, adds comment, updates prices, changes byline)
By Gertrude Chavez-Dreyfuss
NEW YORK, Nov 15 (Reuters) - The dollar rose to a six-week
high on Monday as worries about Ireland's ability to repay its
debt and concerns its problems may spread throughout the euro
zone rekindled the greenback's appeal as a safe haven.
The surge in Treasury yields also supported the dollar
against the yen. The dollar/yen pair has been the most
sensitive to movements in bond yields because both currencies
compete as the markets' favored funding unit in carry trades.
With yields rising in the United States more than in Japan,
the cost of carry in the dollar becomes more expensive. That
should prompt investors to use the yen, which offer lower rates
and less volatility, to wade back into speculative assets.
The euro fell below $1.36 and is set to remain under
pressure in the near term as investors focused on fiscal
troubles in Ireland and Portugal and await meetings of European
finance ministers on Tuesday and Wednesday.
"The issues in Europe have been very focal the last couple
of days and that's lending itself to euro weakness," said Greg
Farinella, managing director and head of Treasury and trading
at Espirito Santo Investment S.A. in New York. Espirito Santo
is the investment banking arm of Banco Espirito Santo, the
second largest bank in Portugal.
Ireland on Monday has denied making any application for
funding to shore up the country's finances, but its prime
minister Brian Cowen said the country's high funding cost would
make it hard for banks to support the recovery.
For more see [].
Ireland's high borrowing costs and large deficit spawned
fears of a Greek-style scenario where budget problems in one
country plunge the entire euro zone into crisis.
In mid-afternoon trading, the ICE Futures' dollar index
<.DXY>, which tracks the greenback versus a basket of
currencies, rose 0.6 percent to 78.532, having hit a high of
78.629, its strongest since early October.
DOLLAR/YEN-BOND YIELD CORRELATION
The dollar rose 0.6 percent to 83.01 yen <JPY=>, after
having touched a near 6-week high of 83.28 yen on trading
platform EBS, boosted by the surge in U.S. Treasury yields.
Yields on the 10-year note hit a three-month high on Monday
as dealers and investors closed out more bets tied to the
Federal Reserve's $600 billion bond purchase program. The
dollar/yen pair has closely tracked U.S. 2-year yields, with a
25-day correlation of 0.84 on Monday.
Since the Fed's announcement of more bond purchases on Nov
3, the benchmark 10-year note yield <US10YT=RR> has climbed
more than a quarter percentage point to 2.93 percent on Monday,
its highest since at least early August. The two-year yield
<US2YT=RR> has increased to 0.53 percent, its highest in two
months.
John Kosar, director of research at Asbury Research in
Chicago, said the dollar has tested significant support levels
versus both the euro and yen over the past month and some
momentum tools "are starting to turn positive on the dollar."
"The larger dollar downtrend is still very much intact. I
don't know there's been any sea change in terms of the
economics that would force the dollar to make a major trend
change."
The euro <EUR=> slipped 0.7 percent to $1.3600. It also
lost 0.1 percent versus the yen to 112.91 yen <EURJPY=R>. The
euro zone single currency has taken a hit the past week as
Ireland struggled to convince investors it was in control of
its debt problems, leaving open the possibility of a bailout.
[]
Portugal is also high on investors' alert list. Finance
Minister Fernando Teixeira dos Santos was quoted as saying on
Monday by the Financial Times that there is a high risk
Portugal will have to seek foreign financial aid.
The minister told Reuters, however, that Portugal has no
plans to request emergency foreign funding. []
The euro also had support at its 55-day moving average at
around $1.3550, a level in which there are reportedly option
barriers. The dollar index, meanwhile, must clear its 55-day
average at 78.97 to extend its rally, traders said.
(Additional reporting by Wanfeng Zhou and Richard Leong;
Editing by James Dalgleish)
