FOREX-Dollar rises with Treasury yields as economic prospects rise

* Dollar index up 0.25%
* U.S. PPI annual gain largest in nearly 2-1/2 years
* 10-year Treasury yield hits one-year high
* Graphic: World FX rates https://tmsnrt.rs/2RBWI5E

(Adds details on Treasuries sell-off, comments from analyst,
updates prices)
By John McCrank
NEW YORK, March 12 (Reuters) - The dollar rose on Friday
following a fresh spike in Treasury yields as the prospect of
economies emerging from year-long coronavirus lockdowns
reignited inflation fears.
Market participants have grown wary in recent weeks that
massive fiscal stimulus and pent-up consumer demand could lead
to a jump in inflation as expanding vaccination campaigns bring
an end to lockdowns.
Data on Friday showed U.S. producer prices (PPI) had their
largest annual gain in nearly 2-1/2 years, though considerable
slack in the labor market could make it harder for businesses to
pass the higher costs on to consumers.
The U.S. economy is set to get a massive shot in the arm
after President Joe Biden signed a $1.9 trillion stimulus bill
into law on Thursday and urged U.S. states to make all adults
eligible for a coronavirus vaccine by May 1. A selloff in Treasuries overnight continued into the U.S.
session, with the yield on the benchmark 10-year note hitting a
fresh one-year high of 1.6420%, helped by optimism around U.S.
economic prospects. The dollar was up 0.25% at 91.668 =USD against a basket of
six major currencies, leaving it on track to end the week
slightly lower.
The greenback hit an intraday high of 92.506 when yields
surged on Tuesday, which was its strongest since November, but
recorded three straight days of losses as yields stabilized.
"Bond yields have been in a very strong uptrend and with the
PPI numbers somewhat higher than consensus, that's contributing
to the rise," said Kathy Lien, managing director at BK Asset
Management.
"That's widely positive for the dollar, as the greenback has
been taking its cues from yields and these new highs are really
encouraging more demand for the greenback, especially at a time
when you have the ECB accelerating bond purchases and being a
little bit more dovish," she said.
The European Central Bank said on Thursday that it would
increase the pace of its money printing to prevent a rise in
euro zone bond yields in support of the economic recovery.
Although the euro was down 0.3% at $1.19505, it was set for
a small weekly gain EUR=EBS .
Traders will be looking to the U.S. Federal Reserve's policy
meeting next week for any comments about rising yields.
They are also keen for any information on the upcoming
expiry of the Fed's temporary easing of the "supplementary
leverage ratio" (SLR), which seems to be part of the reason
behind the sell-off in Treasuries, said Erik Bregar, director
and head of FX strategy at the Exchange Bank of Canada.
The SLR directs large banks to hold more capital against
their assets. Last April, the Fed eased the rules by exempting
certain investments, including Treasuries, from a key leverage
calculation in an effort to improve market liquidity as the
economy cratered due to coronavirus shutdowns. So far there has
been no word from the Fed on a possible extension. "Primary dealers are shedding bonds because this exemption
might not get renewed at the end of March," Bregar said.
Riskier currencies gave back some recent gains on Friday.
The Australian dollar - which is seen as a liquid proxy for risk
appetite - fell by 0.35% to 0.77595 versus the U.S. dollar
AUD=D3 .
The New Zealand dollar was down 0.68% against the greenback
NZD=D3 at 0.7178. The Norwegian crown lost out to both the
euro and dollar.
Dollar-yen was up around 0.52%, changing hands at 109.050
JPY=EBS , close to the 109.235 reached on Tuesday, which had
been the yen's weakest since June 2020.
Elsewhere, bitcoin dropped 1.1% to $57,150.97, having come
close to, but not exceeded, its recent record high of $58,354.14
BTC=BTSP .

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