LDN - Business

Yen surges as U.S. yields fall, pre-UK election, ECB nerves

[June 06, 2017] By Patrick Graham

LONDON (Reuters) - The dollar sank to its weakest since mid-April against the yen on Tuesday, as economic data drove U.S. government bond yields to lows not seen since Donald Trump's election last year and investors sought refuge before big events on Thursday.

Nerves over Britain's election that day showed through in a fall in sterling risk reversals, options used to hedge against or bet on falls in the pound <GBPSWRR=>, although the currency steadied after a 3 percent dip in the past month <=GBP>.

A European Central Bank meeting and former FBI Director James Comey's testimony to a Senate committee due on Thursday also drove investors into the traditional security of the yen.

That took the dollar index, which measures its broader strength against a basket of currencies to the lowest since Nov. 9 of last year. <.DXY>

"People are thinking what are the events we need to worry about, and with things all coinciding on Thursday, a bit of risk has been taken off the table," Jeremy Stretch, a strategist with CIBC in London.

The dollar fell 0.9 percent to 109.28 yen, its lowest since April 21, while the euro sank as low as 122.93 yen.

With the Bank of Japan keeping 10-year Japanese bond yields pinned to zero, the dollar-yen exchange rate has been closely correlated for the past year with any shifts in U.S. 10-year Treasuries.

"It is worth pointing out that the U.S. 10-year is hovering above the key technical level ... at 2.13 percent," Rabobank analysts said in a morning note to clients.

"It must hold to prevent further retracement, with the psychological level of 2 percent as the next potential target if cleared."

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U.S. Dollar and Japan Yen notes are seen in this picture illustration June 2, 2017. REUTERS/Thomas White/Illustration

Treasury yields briefly dipped as low as 2.1290 as U.S. investors arrived at their desks after 1130 GMT.

Comey, the FBI director fired by Donald Trump in May, will be grilled by the Senate Intelligence Committee on whether the U.S. president tried to get him to back off an investigation into alleged ties between his 2016 campaign and Russia.

The threats to Trump and some of his senior advisers from the affair have added to market doubts over the administration's ability to deliver a promised boost to growth.

While U.S. economic data has worsened, in Europe it has been improving and expectations have grown for some sort of change in ECB rhetoric this week. Most traders, however, say it may now be difficult for that to top the expectations priced into the euro.

"Central banks seem to be very good at leaking everything before the event," said Richard Benson, co-head of portfolio investment with currency fund Millennium Global in London.

"The euro looks stronger than most rate differentials would suggest. I think all expectations for Thursday are in the price."

(Editing by Raissa Kasolowsky and Alexander Smith)

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