FOREX: US dollar struggles near multi-month lows, fragile yen gets respite

SINGAPORE - The U.S. dollar stood at three-month lows on Thursday after the Treasury Department moved to calm a bond market rout that had pushed long-end yieldsto their highest since 2007, sapping support for the greenback.

The dollar index =USD, which measures the U.S. currency against six other units, was at 98.813, around its lowest level since mid-May. The euro EUR= was at $1.1676, perched at the highest level since late May.

Investors have been grappling this week with a sharp selloff in the bond market from the U.S. to Europe and Japan on mounting concern about soaring government debt and the spectre of higher oil prices due to the lack of progress in ending the U.S.-Israeli war on Iran.

The 30-year Treasury yield US30YT=RR rose to a 19-year high of 5.337% earlier this week, prompting the U.S. Treasury to unveil plans on Wednesday to double liquidity support buyback operations for longer-dated bonds.

The 30-year yield was last at 5.184% after dropping 9 basis points following the move that effectively shifts more of the government's borrowing toward short-term bills while the Treasury buys back longer-dated debt.

That, analysts said, would help ease pressure on the long end of the curve without the Federal Reserve expanding its own balance sheet.

"The buyback is not QE (quantitative easing) but the Treasury blinked," said Prashant Newnaha, senior rates strategist at TD Securities, noting the timing was interesting as it came ahead of an auction for 20-year notes.

"While the buyback begins on September 9, more interesting was the news around further details on future buybacks to be released on November 4," Newnaha said. "November 4 is the day after the midterm elections. Quite clearly the Treasury is leaving the door open to increase future purchases."

The implication for the dollar is that it has lost one of its strongest remaining pillars of support and the currency's high for the year may be behind it, said Matt Simpson, senior market analyst at StoneX.

"U.S. Treasury has just made it clear they don't want to see the 30-year yield at its pre-global financial crisis level of 5.3%. The question now is whether bond traders want to play nicely and support the market to cap yields," he said.

The dollar weakness provided some relief to the Japanese yen JPY= as the fragile currency pulled away from the closely watched 160 level. The yen was last at 158.45 per dollar, giving up some of its overnight gains.

Sterling GBP= was at $1.3604, just shy of the three-month high, while the Swiss franc CHF= last bought 0.7999 per U.S. dollar, easing from the two-month high it hit in the previous session.

Meanwhile, concern about inflation deepened at the Fed's meeting last month, with several policymakers ready to raise interest rates and many saying a hike in borrowing costs would be needed if inflation did not decline to the U.S. central bank's 2% target, the minutes of the session showed.

Nick Twidale, chief market strategist at ATFX Global, said the next few sessions would provide an indication of the market's view on the Treasury move.

"Always feel the market will want to test the credibility of the action, which could lead to a further dampening of sentiment on the medium term," he said.

-Reporting by Ankur Banerjee in Singapore; Editing by Lincoln Feast and Kate Mayberry/Reuters