By: Hillel Fuld
A short term comeback in the dollar stopped on Thursday but traders said an increase in U.S. Treasury yields could cause more buybacks in the greenback before the Fed’s policy meeting next week.
U.S. bond yields have increased this week partly as euphoria over the Fed's likely asset purchase initiative is being replaced by skepticism over the size of such a program.
"A model player's buying is pushing up the euro in thin trade. But given that U.S. bond yields have risen, the dollar will go in the same direction in the near term," said a trader at a leading Japanese brokerage.
The dollar's destiny has had a tight correlation to U.S. yields and their gap with rates on other leading currencies, as increases in U.S. yields -- other things being equal -- tend to assist the greenback by making dollar investments more appealing.
With the difference between Japan and U.S. two-year yields near a three-week peak and that for 10-year yields near a 2-½ month high, USDJPY could have further room to rebound, some traders said.
Dollar/yen dipped 0.2 percent on the day to 81.60 jpy, but it was still more than a full yen above Monday's 15-year low of 80.41 yen.
The Bank of Japan kept interest rates essentialy at zero and held off from new policy programs on Thursday. It also unveiled details of an asset buying initiative it announced earlier in October.
The BOJ also said it would bring forward its next policy meeting to Nov. 4-5 from Nov. 15-16 to make plans to start buying exchange-traded funds and J-REITs at an early date.
The JPY showed a limited reaction to the BOJ's announcement.
The USD faces strong resistance at 82 yen, which has blocked its advance several times in recent weeks. Its 21-day moving average was also at 82 yen on Thursday.
Aside for a short period after Japan intervened in currency markets on Sept. 15, the greenback has been mostly stable below the 21-day average line since its decline in June, and a rise above 82 JPY could ignite more USD buybacks.