TOKYO, March 22 (Reuters) - The dollar maintained sharp gains from a day earlier on Wednesday as traders felt more confident the Federal Reserve would keep pushing overnight interest rates beyond the expected increase at next week's policy meeting.
An upbeat view of the economy from Fed Chairman Ben Bernanke and data showing a surprisingly big jump in core producer prices in February revived expectations for the central bank to raise rates to 5 percent by May and possibly higher.
The sudden shift in the Fed's policy outlook drove two-year Treasury yields <US10YT=RR> up 9 basis points to 4.74 percent, the largest one-day jump since last July and taking them back near five-year highs.
Just last week the U.S. currency tumbled more than 2 percent on its trade-weighted index against six major currencies as the market scaled back the Fed's likely tightening after soft consumer price figures and on reports the Fed was nearly done.
"Though Fed Chairman Bernanke's speech last night provided little new information, there was some relief that he did not validate other reports suggesting the FOMC is unlikely to raise rates beyond 5.00 percent," said currency strategists at Morgan Stanley in a note to clients.
"Against that backdrop, the higher PPI core reading seemed to strike a nerve in the market," they said.
In early Asian trade, the euro was flat around $1.2095 <EUR=> and has slid from a two-month high of $1.2208 struck last Friday.
Against the Japanese currency, the dollar was also little changed around 117.30 yen <JPY=>. The euro drifted up to 141.90 yen <EURJPY=R> from around 141.80 in late New York trade.
The Australian and New Zealand dollars failed to sustain early gains, as investors sour on the high-yielding currencies with rates on the march higher elsewhere.
The Aussie was little changed on the day at $0.7170 <AUD=><AUD=D4>, in sight of Tuesday's 18-month low of $0.7148 and down about 3.5 percent so far this month.
The kiwi hit a fresh 21-month low at $0.6208 <NZD=><NZD=D4>, shedding 6 percent this month. From its peak in early December, the New Zealand dollar has plunged as much as 14 percent.
TUG-OF-WAR
Overall the top three major currencies remain locked in an undecisive tug-of-war as the Fed is seen raising rates a bit more, while the European Central Bank is also lifting rates and the Bank of Japan is expected to do so before year-end.
But with the Fed closer to the end of its long campaign after 14 consecutive increases since June 2004 to 4.5 percent, the dollar has been very sensitive to changing sentiment on how high U.S. short-term rates will climb.
Analysts are almost unanimous the Fed will bump up its funds rate to 4.75 percent at the two-day meeting ending next Tuesday, the first Bernanke will chair since taking the reins from Alan Greenspan.
The market is leaning towards another Fed tightening at the May meeting but is less certain about the economic outlook and the central bank's response beyond that.
The dollar briefly slipped after Bernanke said that the record U.S. trade deficit will not necessarily trigger a "precipitous" drop in the dollar, and that the economy and markets may be able to withstand any such slide.
Bernanke's comments came in a letter responding to questions that a congressman submitted following the Fed chief's testimony in the House of Representatives on Feb. 15.
An upbeat view of the economy from Fed Chairman Ben Bernanke and data showing a surprisingly big jump in core producer prices in February revived expectations for the central bank to raise rates to 5 percent by May and possibly higher.
The sudden shift in the Fed's policy outlook drove two-year Treasury yields <US10YT=RR> up 9 basis points to 4.74 percent, the largest one-day jump since last July and taking them back near five-year highs.
Just last week the U.S. currency tumbled more than 2 percent on its trade-weighted index against six major currencies as the market scaled back the Fed's likely tightening after soft consumer price figures and on reports the Fed was nearly done.
"Though Fed Chairman Bernanke's speech last night provided little new information, there was some relief that he did not validate other reports suggesting the FOMC is unlikely to raise rates beyond 5.00 percent," said currency strategists at Morgan Stanley in a note to clients.
"Against that backdrop, the higher PPI core reading seemed to strike a nerve in the market," they said.
In early Asian trade, the euro was flat around $1.2095 <EUR=> and has slid from a two-month high of $1.2208 struck last Friday.
Against the Japanese currency, the dollar was also little changed around 117.30 yen <JPY=>. The euro drifted up to 141.90 yen <EURJPY=R> from around 141.80 in late New York trade.
The Australian and New Zealand dollars failed to sustain early gains, as investors sour on the high-yielding currencies with rates on the march higher elsewhere.
The Aussie was little changed on the day at $0.7170 <AUD=><AUD=D4>, in sight of Tuesday's 18-month low of $0.7148 and down about 3.5 percent so far this month.
The kiwi hit a fresh 21-month low at $0.6208 <NZD=><NZD=D4>, shedding 6 percent this month. From its peak in early December, the New Zealand dollar has plunged as much as 14 percent.
TUG-OF-WAR
Overall the top three major currencies remain locked in an undecisive tug-of-war as the Fed is seen raising rates a bit more, while the European Central Bank is also lifting rates and the Bank of Japan is expected to do so before year-end.
But with the Fed closer to the end of its long campaign after 14 consecutive increases since June 2004 to 4.5 percent, the dollar has been very sensitive to changing sentiment on how high U.S. short-term rates will climb.
Analysts are almost unanimous the Fed will bump up its funds rate to 4.75 percent at the two-day meeting ending next Tuesday, the first Bernanke will chair since taking the reins from Alan Greenspan.
The market is leaning towards another Fed tightening at the May meeting but is less certain about the economic outlook and the central bank's response beyond that.
The dollar briefly slipped after Bernanke said that the record U.S. trade deficit will not necessarily trigger a "precipitous" drop in the dollar, and that the economy and markets may be able to withstand any such slide.
Bernanke's comments came in a letter responding to questions that a congressman submitted following the Fed chief's testimony in the House of Representatives on Feb. 15.
