[LehmanBr]

The USD has regained some ground on rising sovereign bond yields. In recent months, the dollar has lost 15 % against the euro, and gold has soared above $1,000/oz, feeding currency stability concerns.

There are about USD7.5trn of USD-denominated assets floating around the globe, of which two thirds are held by private investors. Perceptions that the USD may lose value in the long-term could spark a wave of USD asset selling, adding to USD weakness, steepening the yield curve by pushing long-term US bond yields higher, widening credit spreads and undermining the equity market. Hence the US has moved to provide verbal support for the USD.

Last Friday’s speech by Bernanke had exactly the same content as his speech in July in which he laid the foundation for the US exit strategy from monetary easing. Recall, in June/July, bond yields were trading near 3.8% and the USD was at risk of breaking lower. The verbal intervention by the Fed at that time led to a temporary USD rebound and convinced investors to move back into bonds. Bond yields and credit spreads have eased significantly since then. In this sense the US strategy was very successful. This time it is not so much the bond market concerning the US administration, but the USD, and its potential bearish impact on US asset prices should foreign investors liquidate. Hence, we should expect US verbal intervention to remain strong until the USD has regained some moderate ground.

Meanwhile, US bond yields have risen through the previous downward trend channel and related Bollinger Bands, providing a technical buying signal for bond yields. USDJPY will benefit most from rising US rates. AUDJPY looks best of the bunch and is expected to move to 83.87; EURJPY should see the 133.00 handle.

AUDNZD has surged to a 2mth high above 1.24 after seeing AUD rate markets progressively price in a 50bps RBA rate in November which would increase the AUDNZD rate differential to 125bps.

UK's CEBR has dovishly predicted rates will stay dismally low at 0.50% until 2011 and not be raised to 2% until 2014. The research centre also said Sterling could fall to $1.40 against the USD and possibly below parity with the Euro as UK rates remain low, and the government raises taxes and cuts spending to reduce its budget deficit.