NEW YORK (Reuters) -
The dollar climbed to a 27-month high against the yen and a two-year peak against the euro Monday as investors bet that U.S. interest rates will remain more attractive than in Europe or Japan.
Treasuries tumbled on the interest rate expectations, with the yield on the 10-year climbing above 4.60 percent.
Late afternoon in New York, the euro bought $1.1691, down 0.3 percent against the dollar from levels late Friday, after earlier falling as low as $1.1661, below the two-year low of $1.1668 touched last week.
The dollar bought as much as 118.90 yen, its strongest since August 2003, after breaking through chart resistance at 118.40. The dollar bought 118.73 yen, up 0.7 percent, by late afternoon.
Higher U.S. rates make dollar-denominated securities more attractive and increase demand for the dollars to buy them. But they hurt treasuries sold in the secondary market (such as the prices quoted here), as newer issues will pay higher rates.
The dollar broke above key technical resistance levels, after Japanese Prime Minister Junichiro Koizumi said overnight it was too early to end the country's ultra-easy monetary policy. Japanese demand for foreign bonds also weighed on the yen.
"The top (reason for the dollar's strength) is the yield differential," said Mike Malpede, senior foreign exchange analyst at Refco Group in Chicago. "You have Japan officials saying no abrupt change and mixed signals from Europe."
Though the European Central Bank is expected to raise its benchmark rate in the next few months, it remains unclear when that will happen.
"The dollar rose because upon further review, the Japanese economy did not look nearly as good as most people had thought and the inflation outlook in the euro zone did not look nearly as dire," said Andrew Busch, global FX strategist, capital markets, with Harris Nesbitt in Chicago. "Japan is not going to raise rates, and there is no reason in the world the ECB should raise interest rates anytime soon," Busch added.
Japanese investors showed strong demand for foreign bonds, some analysts said. Japanese investors bought a net 3.5 trillion yen of foreign debt in October, nearly a fourfold increase over the previous month, data from Japan's Finance Ministry showed on Monday.
Koizumi's comments came after weeks of growing speculation that the Bank of Japan could end its "quantitative easing" policy, under which it floods the money market with excess funds, perhaps as early as the first half of next year.
Such a move could cut into the euro and dollar's interest rate advantage over the yen and offer support to the Japanese currency.
Against the Swiss franc, the dollar traded at 1.3173 francs, up 0.4 percent.
Currency markets are keenly awaiting Tuesday's Senate hearing on Ben Bernanke's nomination for U.S. Federal Reserve Chairman for clues on how he would steer monetary policy.
Investors largely ignored comments from current Fed Chairman Alan Greenspan, speaking at a Banco de Mexico conference in Mexico City, when he said the recent dollar rise is a sign the U.S. economy is facing few problems funding its big current account gap but the deficit cannot expand forever.
Although the euro had early support from hawkish comments from central bank officials in the euro zone, investors later focused on statements from euro zone politicians who are less keen on a rate increase that could curb the currency bloc's budding economic recovery.
Markets are paying close attention to comments from ECB officials for clues on when it might move on raising interest rates, which have remained at 2.0 percent for over two years.
In Treasuries, the benchmark 10-year note fell 16/32 to 99-4/32 to yield 4.61 percent, up form 4.56 percent late Thursday. The bond market was closed Friday for Veterans Day.
The 30-year bond tumbled 27/32 to 108-12/32 to yield 4.80 percent, up from 4.74 percent late Thursday. Bond prices and yields move in opposite directions.
In shorter-dated debt, the two-year note fell three ticks, yielding 4.49 percent. The five-year note lost 9/32, yielding 4.55 percent.
For Bond charts, click here.
For a look at the day in stocks, click here.