USD holds gains in wake of Fed, Spain & ECB eyed

 

The U.S. dollar held onto hefty gains in Asia on Wednesday after the market took comments from the Federal Reserve as lessening the chance of further economic stimulus, sending Treasury yields sharply higher.

The dollar index, which tracks its performance against a basket of major currencies, was hovering around 10-day highs of 79.388, having bounced all the way back from a one-month low of 78.664 on Tuesday.

The move higher followed the release of the Fed minutes of its March policy meeting which disappointed those hoping for a step toward further quantitative easing.

The statement sparked heavy selling in U.S. Treasuries with the 10-year yield jumping around 12 basis points to a high of 2.29%, well off last week's trough of 2.15%.

The yen suffered large losses with the USD buying 82.83 yen , having climbed nearly 1% on Tuesday when it touched a one-month low of 81.550.

The USD/JPY appears ready to resume trending higher after key stops below 81.80 yen were triggered. The yen made strong gains last week, underpinned by flows linked to Japan's end of fiscal year.

The ECB holds its April monetary meeting on Wednesday and, while rates are expected to remain unchanged at 1%, the market will be sensitive to any hint of further easing.

The euro slipped to $1.32310, after dipping 0.7% on Tuesday, retreating from a high of $1.33810 early this week.

Charts suggest the single currency is poised to test $1.3150/60, the 100-day moving average and the 61.8% of the Fibonacci retracement of the $1.3004/$1.3385 move.

David Scutt, a trader at Arab Bank Australia is pessimistic given the euro zone's economic fundamentals and budget position.

"The euro has to go lower... The basis of buying euro on a risk-on day is simply not there anymore."

He said concerns on economic growth in the region could see the debt crisis resurface with the euro testing the January lows around $1.2626.

For now, market's focus is on Spain, Europe's fourth largest economy, whose borrowing costs are likely to jump at a bond auction later on Wednesday. The government plans to raise up to 3.5 billion euros in three bonds at 0840 GMT.

Risk currencies were also licking their wounds with the Aussie dollar pulling back to $1.0300. It plumbed an 11-week trough of $1.0295 where a big option defence lies, according to traders.

The Australian dollar was already under pressure after the Reserve Bank of Australia flagged on Tuesday a possible rate cut in May should inflation remain tame.