WHILE the currency world was fixated on the euro and the Greek drama unfolding in Brussels last week, the stealth story in the market was the sudden rise in US dollar-yen which came close to hitting yearly highs as US interest rates spiked unexpectedly. Relatively weak US Treasury auctions sent yields on the 10 year bond to nearly 4 per cent for the first time in four years.

The recent rise in US rates has been driven by a combination of factors including massive fresh supply of bonds from the Treasury as well as stronger appetite for risk from investors demanding higher returns for their money.

The key to whether the recent rise in US rates is benign or toxic for the dollar will depend on this week’s US non-farm payrolls (NFP) report scheduled for 12.30pm UK time on Friday. Although US equity markets will be closed for Good Friday, currencies will have a chance to react to the data.

If the payroll numbers comes in north of 200,000 exceeding consensus expectations, dollar-yen could soar to ¥94 and possibly target the ¥95 level as traders position themselves for stronger US growth in the second half of the year. On the other hand, if the employment data is weak then the deadly mix of weak economic growth and steadily rising rates could raise concerns of a brewing sovereign debt crisis on this side of the pond and push dollar-yen back towards ¥90 on risk aversion flows.

Early indications from the weekly jobless claims data suggest that the employment numbers should turn positive. The weekly jobless numbers have been declining towards the 400,000 level for the past four weeks. Unfortunately, the best predictor of NFP results – the employment component of the ISM Services report – will not be released until next week. Therefore, currency traders will be flying somewhat blind ahead of the report.

However, if the employment results confirm the dollar bull’s thesis that US economy is about to recover and join China to become the second pillar of global growth, then the likely path for dollar-yen is higher as the second quarter begins.

Boris Schlossberg and Kathy Lien are directors of currency research at GFT. Read commentary at or e-mail