Dollar withers to new lows in Asia

The dollar weakened broadly on Thursday, hitting a seven-week low against the yen and a 28-year low against the Australian currency as traders took falls in US bond yields as a cue to sell it. US Treasury prices recovered on Wednesday, pushing yields sharply lower, after a $29 billion auction of seven-year notes drew surprisingly strong demand a day after a weak five-year sale.
"Some market players may be building up positions for the next year. As the Federal Reserve is expected to keep printing dollars, the dollar looks set to cheapen next year," said Tsutomu Soma, manager of foreign securities at Okasan Securities. As the euro, a natural alternative for the dollar, is smarting from concerns over debt financing of the currency bloc's peripheral countries, investors may be turning to other currencies such as the yen, the Aussie and the Swiss franc, he said.
While the relationship with bond yields and the value of a currency is not always straightforward, lower yields can make a currency less attractive for investors chasing better returns. The dollar slipped as low as 81.28 yen, its lowest in seven weeks and edging closer to a 15-year low of 80.21 yen hit in November. As thin trading due to the New Year's holiday tends to exaggerate currency moves, market players say there is a risk of the dollar falling near the November low or even to its post-war low of 79.75 yen marked in 1995. Data on US initial jobless claims later in the day and more importantly US manufacturing data due on Monday could provide the impetus to push the dollar down, they said.
Keiji Matsumoto, a strategist at Nikko Cordial Securities, said a rise in the Chinese yuan after China's rate hike last Saturday is supporting Asian currencies, including the yen. "There will be speculation that China may engineer a higher yuan ahead of Chinese President Hu Jintao's state visit to the United States next month," Matsumoto said. Hu will visit Washington on January 19.
Some analysts said the dollar is likely to rise against the yen eventually as its levels are too low in light of its historical correlation with the two-year US Treasury yield. Osamu Takashima, chief Japan FX strategist at Citibank, estimates that the current level of two-year US yields, around 0.65 percent, points to around 88 yen for dollar/yen if the historical correlation holds. The current level is about 3.7 sigma away from that level, meaning the dollar is at a cheap level relative to yields that should happen only once in 19 years, Takashima said.
The euro extended gains to $1.3237, rising above $1.3226, a 38.2 percent retracement of its fall from $1.35 to $1.3055 earlier this month. The euro's stubborn refusal to break below its 200-day moving average, now at $1.3086, has frustrated bearish investors who think the eurozone debt crisis could spread to Spain and Portugal in early 2011.
On the upside, it could target $1.3275-80, its high on Tuesday as well as a 50 percent retracement of the fall. Still, traders say concerns over debt in some euro zone countries could crop up at any time after many investors and policymakers come back from Christmas holidays. The Swiss franc, which has attracted funds escaping eurozone debt, hit a new high record against the dollar of 0.9418 franc.