November 22, 2017 / 3:28 AM / a year ago

FOREX-Dollar treads water, capped by sagging long-term U.S. yields

* Dollar capped as U.S. yields slip despite surging equities

* Market takes Yellen speech in stride, Fed meeting minutes next (Adds details and quotes, updates prices)

By Shinichi Saoshiro

TOKYO, Nov 22 (Reuters) - The dollar treaded water against its peers on Wednesday, capped as U.S. Treasury yields failed to rise despite increasing investor risk appetite in broader financial markets.

The dollar index against a basket of six major currencies was little changed at 93.941.

The index fell back from a one-week high of 94.165 overnight after a rally triggered earlier this week by a sagging euro stalled as long-term U.S. Treasury yields continued inching lower.

The greenback was a shade lower at 112.280 yen, after slipping overnight from a high of 112.705.

“The dollar should be getting more of a lift against the yen in this ‘risk on’ environment. But what is taking precedence is the adjustment of positions before the Thanksgiving and year-end holidays by participants, resulting in the covering of yen shorts,” said Yukio Ishizuki, senior currency strategist at Daiwa Securities.

Wall Street shares rose yet again to record highs on Tuesday, while Japan’s Nikkei climbed back towards 26-year peaks.

The ongoing flattening of the Treasury yield curve, which has capped long-term yields, is a further drag on the dollar, Daiwa’s Ishizuki said.

The U.S. yield curve flattened to its lowest in a decade on Tuesday, as investors price in the expectation that the Federal Reserve will continue to raise rates while the Treasury is seen increasing short-dated debt issuance. At the same time low inflation and global demand for yield has supported longer-dated debt.

Another factor seen supporting the Japanese yen on a broader level was its recent gains against the euro.

The common currency slumped against its peers at the start of the week as German Chancellor Angela Merkel’s failure to form a three-way “Jamaica coalition” government clouded the country’s political outlook.

“Cross yen pairs recently enjoyed a good run higher. Of these pairs, euro/yen holds a dominant position,” said Koji Fukaya, president at FPG Securities in Tokyo.

“Selling of the euro against the yen gathered momentum as traditional profit-taking before Thanksgiving was joined by market participants dissolving euro longs on the German political news.”

The euro was last 0.2 percent lower at 131.790 yen , having gone as low as 131.160 on Monday to its weakest since mid-September.

The currency market showed little response to comments by Fed Chair Janet Yellen, who said late on Tuesday the central bank is “reasonably close” to its goals and should keep gradually raising U.S. interest rates to avoid the dual pitfalls of letting inflation drift below target for too long and driving unemployment down too far.

Next in focus was the minutes of the Oct. 31-Nov. 1 Fed policy meeting minutes due later in the session, to be evaluated for any new indications that an interest rate hike is likely in December.

The euro was steady at $1.1737 after crawling away from a one-week low of $1.1712 brushed overnight on the political impasse in Germany.

The Australian dollar was 0.1 percent lower at $0.7568 after slipping to a five-month trough of $0.7532 overnight on dovish-sounding Reserve Bank of Australia policy meeting minutes.

The New Zealand dollar was steady at $0.6829 after digesting a surprise increase in October domestic milk production. New Zealand is a top dairy exporter and factors that are considered negative for milk prices tend to hurt the kiwi.

Reporting by Shinichi Saoshiro; Editing by Richard Pullin and Jacqueline Wong

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