Dollar Gains, Yen Slips as Japanese Yields Tumble

Dollar Strengthens as Yen Weakens Amid Falling Japanese Bond Yields

By Karen Brettell

NEW YORK (Reuters) -The dollar strengthened on Tuesday as the yen came under pressure from a sharp fall in Japan's long-dated bond yields, while the greenback was boosted by data showed improving U.S. consumer confidence.

“It's very much being driven by global bond markets, and most recently what we've seen in Japan,” said Eric Theoret, FX strategist at Scotiabank in Toronto. “Market participants are reading into the fact that the Ministry of Finance sent out a questionnaire to their primary dealers about issuance.”

Bloomberg reported on Tuesday that the Ministry of Finance sent a questionnaire to market participants regarding issuance and current market issues. Japan will consider trimming issuance of super-long bonds in the wake of recent sharp rises in yields for the notes, two sources told Reuters on Tuesday.

The plan comes amid a recent spike in super-long bond yields to record levels due to dwindling demand from traditional buyers such as life insurers and global market jitters over steadily rising debt levels.

The dollar was last up 1% at 144.26 Japanese yen. The euro fell 0.27% to $1.1356.

The greenback added to gains after data showed U.S. consumer confidence in May was much better than economists had expected.

The euro, meanwhile, was dented by data showing that French inflation fell to its lowest level since December 2020 in May.

The dollar was also boosted after U.S. President Donald Trump on Sunday dropped his threat to impose 50% tariffs on European Union imports from next month. The decision gave 'new impetus' to trade talks, the EU said on Monday.

Investors are concerned that tariffs will hurt growth and potentially reignite inflation, though traders have become less pessimistic on the U.S. economic outlook since the United States and China earlier this month reached a deal to slash tariffs they had imposed on each other.

Longer-term, the more protectionist stance of the United States is expected to continue to hurt the greenback.

“We're still in an environment of medium to longer term U.S. dollar weakness,” said Theoret.

European Central Bank President President Christine Lagarde said on Monday that the euro could become a viable alternative to the dollar if governments could only strengthen the bloc's financial and security architecture.

Investors are watching the passage of a spending and tax bill through Congress that is expected to add trillions of dollars of debt.

U.S. Senate Republicans said on Thursday they will seek substantial changes to the spending bill after it narrowly won approval in the House of Representatives.

(Reporting by Karen Brettell; Additional reporting by Lucy Raitano in London and Rocky Swift in Tokyo; Editing by Mark Potter and Bernadette Baum)