Dollar recovers from Russia's comment
The fifth-largest holder of U.S. government debt says it intends to cut the amount of Treasurys it holds.
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| Click on the chart to see other government bond prices and yields. |
NEW YORK (Reuters) -- The dollar rose against the euro Wednesday, erasing losses suffered after Russia's central bank said it will diversify its currency reserves by cutting U.S. Treasury purchases and buying IMF-backed bonds.
The euro initially rose as investors betting the worst of the global slump was over saw less need to buy the dollar as a safe haven, and Russia's warning added to euro gains.
But traders said its rise to $1.4145 triggered automatic sell orders that pushed it back to $1.3982, down 0.3% on the day.
"These are rather violent markets without huge conviction, so when the euro got a bit heavy, people headed for the door," said Firas Askari, head of FX trading at BMO Capital Markets.
"I'd still look to pick up the euro in the low $1.40s but it pays to be nimble right now," he added.
The pound held gains at $1.6379 but was well off a session peak of $1.6473. It also hit its highest level of the year against the euro, boosted by data showing the first rise in U.K. industrial output since February 2008.
The Australian dollar was up 0.6% to $0.8055. The dollar rose 0.7% to 98.04 ye .
Russia's plans to diversify its reserve holdings, detailed ahead of next week's Moscow meeting among heavyweight emerging markets China, Brazil, India and Russia, sent U.S. Treasury yields higher and initially added to broad-based dollar selling.
Russia holds about 30% of its $404.2 billion foreign exchange reserves in Treasurys, making it the fifth largest holder of U.S. government debt.
But analysts said Russia's roughly $140 billion in long-dated U.S. Treasurys pales in comparison to the sheer volume of outstanding debt. The Treasury plans to issue some $2 trillion this year alone.
Also, the bonds backed by the International Monetary Fund that Russia has said it would buy instead do not yet exist, analysts pointed out.
With the U.S. budget deficit expected to hit $1.8 trillion this year and rise further from there, "of course Russia, China, everyone wants to diversify their holdings in the long run," Askari said.
"But they're all long Treasurys and can't just dump them at once," he added. "And for now, the U.S. Treasury market is still the deepest and most liquid available."
In the Treasury market, the benchmark 10-year bond yield rose to 3.92% on Wednesday, near its highest level since November, and analysts said this would likely heighten interest in an afternoon auction of $19 billion in 10-year notes.
But Boris Schlossberg, director of FX Research at GFT Forex, said recent auctions have attracted sizable demand despite rising yields and U.S. budget deficit concerns.
"So for the time being, I think (the Russia comments about the dollar) are a tempest in a teapot," he said.
A rise in the April U.S. trade gap raised some concerns "because we're not seeing any foreign demand for U.S. exports," said Omer Esiner, senior currency analyst at Travelex Global Business Payments in Washington.
Some analysts said investors' hopes for a global recovery were overdone and could spark a safe-haven dollar rally.
"High energy prices could nip recovery in the bud, but markets are not reflecting the reality on the ground," said Brian Dolan, chief strategist at Forex.com. "We like the dollar from here." 
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