FOREX-Dollar hits five-month highs vs yen as U.S. yields rise

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

By Ritvik Carvalho
LONDON, Feb 17 (Reuters) - The dollar rose against
low-yielding currencies on Wednesday, reaching 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 set a record high of $51,721, a day after
the cryptocurrency rose to $50,000 for the first time. That
brought 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
recovered from Tuesday's three-week low of 90.117 to last stand
0.2% higher at 90.864. =USD
Soaring U.S. bond yields boosted the dollar, with the
10-year yield rising as high as 1.333% US10YT=TWEB from around
1.20% at the end of last week.
"The sell-off in U.S. Treasuries is the major driver of FX
at the moment, with the dollar inevitably finding support, and
not only vs the usual victim JPY (USD/JPY has the highest
correlation in FX with US 10Y yields), as commodity currencies
are actually being hit the hardest," said Francesco Pesole, G10
FX strategist at ING.
"While the bond market is doubling down on reflationary
bets, other assets are failing to show signs of upbeat risk
sentiment. The risk is that the rise in U.S. yields has gathered
such pace so as to start being self-defeating and cause a
correction in risk assets."
The yen, which is sensitive to U.S. yields, reacted the most
with the dollar jumping to as high as 106.225 yen in Asian
trade, its highest since September, before retreating to 105.89
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. 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 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 concern over
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. The euro slipped 0.4% to $1.2058 EUR= , though its fall was
less pronounced after its gains earlier on Tuesday following
strong German economic sentiment data. "Although we continue to see short-term risks to EUR/USD as
balanced, it was worth yesterday to notice the USD reaction to
stronger U.S. data," said Mikael Milhøj, senior analyst at
Danske Bank.
"Unlike recently where we saw weakness in payrolls and CPI
data take USD weaker, we now saw some evidence that positive
data surprises (Empire manufacturing) are USD-positive too. This
is different from last year, where positive US surprises were
USD-negative by removing global deflation risks."
The positive mood on the economic outlook is underpinning
risk-sensitive currencies.
The British pound fell 0.3% to $1.3856 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 86.84 pence per euro EURGBP=D4 .
The Australian dollar fell 0.2% to $0.7736 AUD=D4 , not far
from Tuesday's one-month high of $0.7805.
The offshore Chinese yuan stepped back to 6.4576 per dollar
CNH= after hitting a two-and-a-half-year high of 6.4010
earlier in the week.

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