FOREX-Dollar hits 5-month high against yen as inflation talk boost U.S. yields

* Dollar springs back against low-yielding currencies
* Yen near 4-month low as U.S. bond yields gain
* Risk-sensitive currencies supported
* Graphic: World FX rates https://tmsnrt.rs/2RBWI5E

By Hideyuki Sano
TOKYO, Feb 17 (Reuters) - The dollar held the upper hand
against low-yielding currencies on Wednesday, hitting a
five-month high against the yen as U.S. bond yields jumped on
the prospects of further economic recovery and a possible
acceleration in inflation.
Bitcoin BTC=BTSP traded just below the $50,000 mark, a day
after the cryptocurrency hit that level for the first time,
bringing its total market capitalisation to more than $900
billion, as traders bet on its further acceptance among major
companies. The dollar's index against six other major currencies jumped
back from a three-week low of 90.117 hit on Tuesday to last
stand at 90.665.
Soaring U.S. bond yields boosted the dollar, with the
10-year yield rising to as high as 1.333% US10YT=TWEB from
around 1.20% at the end of last week.
"The move up in yields has been driven by increasing
inflationary concerns amid a rise in energy prices along with
the prospect of a big U.S. fiscal stimulus and the global
recovery entering a more solid stage as vaccine roll out lead to
the reopening of economies," said Rodrigo Catril, senior FX
strategist at National Australia Bank in Sydney.
The yen, which is sensitive to U.S. yields, reacted the most
with the dollar jumping to as high as 106.225 yen, its highest
since September, before retreating to 105.91 yen JPY= .
"I think the dollar's downtrend is over. At the start of the
year, speculators were betting on a fall in the dollar below 100
yen. They seem to have abandoned such a view now," said Yukio
Ishizuki, senior strategist at Daiwa Securities.
A sign of dwindling bets on the dollar's fall against the
yen is apparent in the options market, where short-term dollar
call options, or bets on the dollar, have become more expensive
than dollar puts, bets against the currency.
The one-week risk reversal spread JPYSWRR=FN is now in
favour of dollar calls for the first time in almost five years.
"If one thinks U.S. yields will rise further, we could see
more gains in the dollar," said Jun Arachi, senior currency
strategist at Rakuten Securities.
"I would say this trade could continue until Biden
Administration's stimulus package will come into effect,
possibly in March, at which point people could start unwinding
their bets to 'sell-on-fact'".
Biden tried to build public support for his $1.9 trillion
coronavirus relief plan in a town hall.
The euro slipped slightly to $1.2085 EUR= though its fall
was less pronounced due to its gains earlier on Tuesday
following strong German economic sentiment data. The New York Federal Reserve's Empire State manufacturing
report released on Tuesday offered an upbeat economic picture,
with a rise in its "prices paid index" stoking fear of faster
inflation.
That optimism was echoed by St. Louis Fed President James
Bullard, who told CNBC that U.S. financial conditions were
"generally good," and that inflation was likely to heat up this
year.
San Francisco Fed President Mary Daly, however, said
pressures on inflation are still downward, pushing against
critics warning low interest rates and government spending could
overheat the U.S. economy and spark high inflation. "Her comments are not resonating with market players
preoccupied with inflation at this point," said Daiwa's
Ishizuki.
The positive mood on the economic outlook is underpinning
risk-sensitive currencies.
The British pound held firm at $1.3895 GBP=D4 , having
reached its highest level since April 2018 on Tuesday. Against
the euro, the pound traded at its highest level since early May
at 87.02 pence per euro EURGBP=D4 .
The Australian dollar stood at $0.7750 AUD=D4 , down
slightly but still not far from Tuesday's one-month high of
$0.7805.
The offshore Chinese yuan stepped back slightly to 6.4359
per dollar CNH= after hitting a 2-1/2-year high of 6.4010
earlier in the week.

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