NEW YORK (CNN/Money) -
The euro renewed its assault on the dollar Tuesday as investors tested Europe's resolution to curb the single currency's ascent.
At around 3:45 p.m. ET, the euro bought $1.2580, well under Monday's record highs of almost $1.29, but still up from $1.2352 late Monday. The dollar also slipped versus the yen, falling to ¥107.09 from ¥107.26 late in the previous session.
Jean-Claude Trichet, president of the European Central Bank, last week warned that the ECB does not approve of the uneven exchange rates between the dollar and the euro.
"There was a mention by Europe that excess volatility and brutal moves were not welcome and not appropriate," Trichet cautioned. "We are concerned. We are not indifferent," he added, referring to Europe.
Trichet's comments knocked the euro down by 5 cents last week, but the currency quickly rebounded after a Monday meeting of euro zone policymakers failed to come up with concrete plans to halt the euro's recent run-up.
"I think the European finance ministers had an opportunity on Monday to scare off bullish euro investors by threatening intervention or rate cuts to undo euro strength. They missed that opportunity," Rebecca Patterson, currency strategist at J.P. Morgan Chase in New York, told Reuters.
Treasury prices, meanwhile, drifted lower amid the lack of fresh economic news Tuesday.
Long-term bonds continued to reel from Friday's report that consumer sentiment jumped in January. The University of Michigan's index of consumer sentiment for the month rose to 103.2 from 92.6 in December -- its highest level since November 2000 -- as stocks rallied and job seekers grew more confident of finding work as the economy recovers.
The benchmark 10-year note fell 7/32 of a point in price to 101-18/32, yielding 4.05 percent, up from 4.03 late Friday. The 30-year bond dipped 16/32 of a point to 106-21/32 with a yield of 4.93 percent, up from 4.89 late Friday.
Bond prices and yields move in opposite directions.
Short-term debt fared slightly better. The two-year note rose 1/32 of a point at 100-13/32, yielding 1.66 percent, and the five-year note gained 2/32 of a point to 100-30/32 to yield 3.04 percent. Bond trading was closed Monday in observance of the Martin Luther King, Jr. holiday.
Treasurys derived some indirect support from the Bank of Canada's decision to cut interest rates 0.25 of a point to 2.5 percent.
But, dealers were less sure what to make of a surprise monetary easing by the Bank of Japan. Interest rates there have long been at zero, so the BOJ has been undertaking a quantitative easing by flooding the banking system with cash.
On Tuesday it raised the target volume for surplus cash in the system, citing the strength of the yen as justification. The dollar duly rose on the yen but such gains are not welcomed by U.S. bond bulls these days.
That is because dollar weakness has proved to be a huge positive for the Treasury market in the last year or so since some Asian central banks have intervened massively to restrain their currencies and parked much of the dollars bought in U.S. government debt.
Reports in the Japanese media suggest the Ministry of Finance alone spent an astounding ¥6 trillion on intervention since the start of the year, which at current rates is the equivalent of about $56 billion.
Federal Reserve data already shows offshore central banks bought almost $15 billion of Treasurys in the week of Jan. 14, and another big rise is expected in the latest week. That flood of money is one reason yields hit three-month lows last week.
"For us, the great thing about the MOF is that it's not price sensitive -- it doesn't care how expensive Treasurys get because its main aim is to hold down the yen, not make a decent return," noted a trader at a U.S. primary dealer.
"And in that sense it's also a captive investor, since if it sells its holdings the yen will surely rise. If only all our customers were this way," he added.
-- from staff and wire reports
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