Dollar stays firm, focus returns to U.S. yields

TOKYO, June 12 (Reuters) The dollar was firm against the euro and the yen on Tuesday as the market focused on U.S. bond yields, while the New Zealand dollar inched up from lows hit the previous day after the Reserve Bank of New Zealand intervened.

The market was closely watching whether benchmark 10-year U.S.

Treasury yields would re-test last week's peak of 5.25 percent to determine how much further the U.S. currency could advance, traders said.

Treasury yields have risen sharply over the past week, pushing 10-year yields near a five-year high on diminishing expectations for Federal Reserve rate cuts and worries about global monetary tightening to combat inflation pressures.

''Because bond yields moved sharply last week, pulling the dollar higher, the market is focusing on whether U.S. bonds will stabilise, and also let the dollar pause from its recent gains,'' said Masafumi Yamamoto, currency strategist at Nikko Citigroup.

''There is a risk for yields to ease back after a rapid rise, but if upcoming data is strong, yields will likely come under upward pressure while the dollar may be supported,'' he said.

The New Zealand central bank's intervention to sell its currency after the kiwi hit a 22-year high versus the U.S. dollar last week has done little to cool carry trades, in which investors use low-yielding currencies such as the yen to pick up assets in high-yielding ones, traders said.

New Zealand's action was seen as an isolated case with little overall market impact, as it ran counter to the current trend of global monetary tightening in line with solid economic fundamentals, traders said.

The dollar was little changed around 121.70 yen The euro was steady around $1.3355 near a two-month low around $1.3320 touched on Friday as the 10-year Treasury yield surged to match the Fed's target overnight rate of 5.25 percent.

The euro was down 0.09 percent against the yen at 162.47 yen Monday's RBNZ selling helped to drive the New Zealand dollar to a low of US$0.7467 from US$0.7638 in late U.S. trading on Friday. The kiwi was trading up 0.08 percent at US$0.7519.

NZD was up 0.04 percent at 91.46 yen below a 17-year high just below 93 yen hit on Friday.

U.S. Treasury prices fell on Monday after Cleveland Federal Reserve President Sandra Pianalto said the fundamentals of the U.S.

economy were strong and the biggest risk was inflation, keeping the key 10-year yield just below a five-year high.

REUTERS SRS PM0628