Firm bond yields push US dollar to 4-month high

London

THE US dollar hit a four-month high on Wednesday after a rise in benchmark US Treasury yields above 3 per cent rattled some currency bears and led investors to consider whether the greenback was breaking out of a prolonged weak spell.

The US 10-year treasury yield has risen to its highest in more than four years, driven by worries about the growing supply of government debt and inflationary pressures from rising oil prices. That has caused US-Japan and US-German yield differentials to widen further in the US dollar's favour, leaving the yen and the euro lower.

The US dollar's performance against a basket of major currencies rose to as high as 91.117 in early London trade, its strongest level since Jan 12. The US dollar index last stood at 91.130, up 0.4 per cent on the day.

Analysts on Wednesday saw signs the US dollar could be breaking higher after months of relative weakness. "With the impact on risk appetite of a continued tightening of Fed policy and the possibility that the pace of growth in many countries may moderate ... there is evidence to suggest the dollar could strengthen," said Rabobank FX strategist Jane Foley in a note.

But other analysts said net long US dollar positions had not risen significantly in recent weeks, despite trade tensions waning. US first-quarter gross domestic product data due on Friday could determine whether the US dollar extends its gains further.

The US dollar's gains on Wednesday drove the euro down past the two-month low hit on Tuesday because of concerns that firmer US yields would reduce demand for the region's bonds at a time when hedge funds have amassed record long euro bets. Investors are focused on whether a European Central Bank (ECB) monetary policy meeting on Thursday will see the euro-US dollar exchange rate break out of its recent tight range. Analysts say the market needs clarity about the speed of the ECB's monetary tightening cycle before the euro, which rallied at the start of this year before running out of steam in the last two months, breaks higher.

The rise in bond yields also weakened Asian emerging market currencies versus the US dollar on Wednesday, with the Chinese yuan down and the Indonesian rupiah trading near a two-year low of 13,895 per US dollar. Against the yen, the US dollar hit a two-month high of 109.270 yen. Easing concerns over global political risks weighed on the Japanese currency, market participants said, as the yen tends to attract demand in times of economic uncertainty and market turmoil, and sell off when confidence returns. REUTERS