By William L. Watts and Lisa Twaronite, MarketWatch
LONDON (MarketWatch) — The U.S. dollar gained on rivals Thursday as investors awaited an auction of 30-year Treasury bonds and the euro sank in response to soaring borrowing costs for Portugal.
The dollar’s moves have recently strongly correlated with yields on U.S. government debt, as higher yields are more appealing to investors. See Bond report.
The dollar index (DXY 78.12, +0.48, +0.61%) , a measure tracking the greenback against a basket of six currencies, rose to 78.024 from 77.661 late Wednesday.
The euro (EURUSD 1.3620, -0.0105, -0.7649%) traded at $1.3624, down from $1.3721 in late North American trading Wednesday. See real-time currency quotes and tools.
Traders said Portugal was the primary culprit, as the yield on 10-year government bonds pressed above 7.6% at one point, up from around 7.27% late Wednesday and leading other peripheral euro-zone bonds to widen their yield premiums over Germany.
The move brought the European Central Bank, which has stayed out of the markets in recent weeks amid relative calm, off the sidelines to buy Portuguese debt, traders and strategists said.
Strategists said that there appeared to be no single catalyst for the renewed pressure on Portuguese bonds but that disappointment over the lack of progress toward solving the region’s ongoing debt crisis contributed to the negative tone.
“With short covering supporting the periphery over the last couple of weeks, debt concerns have taken somewhat of a back seat, but today’s events show that the issue of absolute yields in the periphery are of structural concern,” said Chris Walker, strategist at UBS.
On Wednesday, the dollar slipped as U.S. Treasury yields fell after a successful 10-year note sale and testimony from Federal Reserve chief Ben Bernanke that indicated no intention of tightening monetary policy any time soon. Read more on prior session’s trading in currencies.
Washington will auction off $16 billion of 30-year bonds later Thursday.
Also Thursday, the British pound (GBPUSD 1.6054, -0.0039, -0.2422%) bought $1.6063, down from $1.6099.
The pound briefly extended losses after the Bank of England left its key lending rate unchanged at 0.5%. Read about the dilemma facing the Bank of England.
Although the move was expected, talk of the potential for a surprise on rates policy appeared to have led to a tilt toward long positions ahead of the announcement, wrote strategists at Moneycorp.
Against the yen, the dollar (USDYEN 82.8600, +0.5100, +0.6193%) rose to ¥82.77, up from ¥82.42 late Wednesday.
