US yields may keep fuelling dollar rise

The dollar's fortunes are tied to Treasury yields for now. The dollar could climb next week if the Federal Reserve at a two-day policy meeting ending on Thursday maintains a focus on inflation pressures, which could push up yields.
The benchmark yield on the 10-year Treasury note exploded above 5 percent two weeks ago as signs of strength in the US economy sharply reduced expectations for Fed interest rate cuts this year, in turn supporting the dollar.
"Yields will continue to either hold their ground or push a little higher and that will be dollar supportive," said Matt Kassel, director of foreign exchange at ING Capital Markets.
Analysts say easing US consumer inflation could allow the Fed some breathing room to keep the federal funds rate steady at 5.25 percent for the rest of the year, but policy-makers will likely continue to zero in on inflation expectations given how tight labour markets are.
A week ago the spread of the implied US interest rate in December 2008 over the euro zone's was the widest in three months at 71 basis points. The spread was last at 65 basis points. The euro has slowly climbed back from 2-1/2-month lows hit last week to around $1.3470 but a sustained push above $1.35 will likely depend on the Fed's policy statement on Thursday.
The following are some key events next week for the foreign exchange market: Sales are expected to slip to an annualised pace of 5.94 million units from 5.99 million in April, according to a Reuters poll. Since peaking in September 2005, sales have fallen 17 percent and have slowly removed a buttress to the US economy.
Sales are forecast to decline to an annualised rate of 925,000 units from 981,000 units in April. The Federal Open Market Committee is expected to leave the benchmark US interest rate steady at 5.25 percent, 125 basis points above the euro zone rate but 25 basis points below the UK's official rate. But policy-makers may tinker with the language on the accompanying statement to reflect a downtrend in inflation.
The core CPI is expected to slip 0.1 percent, matching the decline in April. Hiroshi Watanabe, the country's vice finance minister for international affairs, said on Tuesday he expects consumer inflation to flip to positive this summer. However, continued negative readings on core CPI may not dissuade the Bank of Japan from raising what is the lowest benchmark interest rate in the developed world.
In April, the index - which is the Federal Reserve's favoured inflation gauge - eased to 2.0 percent on an annual basis. That was the lowest reading since February 2006 and part of a downtrend that began four months ago.