Dollar falls on narrowring US yield advantage

March 30 | Updated: Mar 31 2006, 05:30am hrs
The dollar fell against the euro and yen on speculation the yield advantage of US assets over Europe and Japan will narrow this year.

Traders increased bets the European Central Bank will lift interest rates three more times as growth picks up. A report tomorrow may show rising consumer prices in Japan, paving the way for the Bank of Japan to raise borrowing costs for the first time in five years. The dollar gained 14% last year as the Federal Reserve lifted its key rate eight times.

It is a good selling opportunity for the US currency, said Kamal Sharma, a currency strategist at Bank of America Corp in London. Yield spreads are not moving in favor of the dollar.

The dollar fell to $1.2076 per euro at 10:31 a.m. in London from $1.2024 late yesterday in New York. It traded at 117.43 yen, from 117.82.

The single currency is up 1.7% this year as the ECB lifted rates twice in the past three months. The Fed raised its benchmark for the 15th straight time earlier this week to 4.75%.

The yield gap, or spread, of 10-year US notes over German debt of the same maturity narrowed for the third straight day. It declined to 1.037 percentage point, compared with this years high of 1.17 percentage point.

People are focusing as early as May for the next rate hike from the ECB, said Ian Stannard, a currency strategist in London at BNP Paribas SA. Broad-based support for the euro is starting to pick up.

Traders raised bets the ECB will lift rates to 3.25% this year, futures prices show, from 2.5%. The yield on the three-month Euribor contract due December 2006 was 3.46% percent today.

The contracts, traded electronically on the London International Financial Futures Exchange, settle to the three-month euro interbank offered rate, which has averaged 0.16 percentage point over the ECB rate since 1999.

By contrast, futures indicate traders are pricing in one more quarter-point US rate increase this year.

BNP Paribas SA, JPMorgan Chase & Co and UBS AG this month raised forecasts for the ECBs rate by the end of 2006 to 3.25% percent, from 3%. Deutsche Bank AG and Calyon lifted their estimates for the ECBs rate by June 2007 to 3.5%, from 3% and 3.25%, respectively.

ECB council member Yves Mersch yesterday said the bank must walk the talk to counter inflation in the dozen euro nations, the International Herald Tribune reported in an interview.