April 27, 2018 / 7:43 AM / 23 days ago

FOREX-Dollar set for best weekly gain since Nov 2016 on yield bets

* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh

By Saikat Chatterjee

LONDON, April 27 (Reuters) - The dollar edged higher on Friday and is on track to post its best weekly performance in more than 1-1/2 years as a spike in U.S. Treasury yields prompted some investors to unwind some short bets against the dollar, especially against some emerging market currencies.

Against a basket of rivals, the dollar rose 0.2 percent to 91.71, its highest level since Jan 12. For the week, it has gained more than 1.5 percent and is on track to post its best weekly performance since late November 2016.

While the dollar has ignored yield differentials for more than a year with investors preferring to give greater weight to the momentum of economic recovery in other major economies, notably Europe, this week’s spike of ten-year U.S. Treasury yields above the 3 percent mark forced investors to acknowledge the widening yield differentials favoring the greenback.

“U.S. rates didn’t matter for the dollar, now they do and our positioning metrics suggest there is further scope for short dollar positions to be unwound,” said Michael Sneyd, global head of FX strategy at BNP Paribas in London.

Benchmark ten-year U.S. Treasury yields surged past the 3 percent mark earlier this week before peaking out at 3.03 percent on Wednesday. Short-dated U.S. yields hit a more than a decade high of 2.51 percent on Wednesday.

The rise in U.S. Treasury yields has unnerved some currency bears who had piled multi-year short bets against the dollar on expectations the world’s biggest economy was in the late stages of an economic expansion which might force the central bank to slow the pace of its policy tightening.

“We think those concerns are unfounded and the U.S. central bank is on track for three if not four rate hikes in 20218,” said Nish Parekh, a senior trader with Silicon Valley Bank based in London.

Speculators’ net dollar short position in currency futures in Chicago, a closely-watched indicator on market positioning, had hit a 6-1/2-year high, suggesting some short-covering will be due.

In Japan, the Japanese yen was little changed after the central bank’s policy decision at which it kept settings unchanged.

In the BOJ’s first policy meeting under the new leadership, the central bank dropped a reference to inflation reaching its two percent goal in about two years, however, few see policy implications from this shift in communication.

The dollar changed hands at 109.17 yen, having risen to a 2-1/2-month high of 109.49 yen earlier in the week. So far this week, it has gained 1.4 percent.

The euro, in which speculators held record long position, fell to $1.20965 in the previous session, its lowest level since Jan. 12. It last stood at $1.2112, and is down 1.4 percent on the week. (Reporting by Saikat Chatterjee Additional reporting by Hideyuki Sano in TOKYO Editing by Matthew Mpoke Bigg)

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