US dollar steady, rally slows as equities slide on higher yields

[TOKYO] The dollar was steady on Wednesday, just below a four-month high reached after the US 10-year bond yield hit 3 per cent for the first time since early 2014, as a slide in Wall Street stocks slowed the pace of the greenback rally.

The dollar index against a basket of six major currencies was little changed at 90.824 following a rise overnight to a four-month top of 91.016.

The greenback had risen without pause through much of the past week as US-China trade conflict woes receded and allowed the market to turn its attention back to dollar-supportive fundamentals, notably the surge by US yields.

But the 10-year Treasury yield reached the 3 per cent threshold for the first time in more than four years overnight and triggered a slide on Wall Street, which in turn weighed on the dollar.

The US currency was a shade higher at 108.935 yen. It pulled back from a 2-1/2-month high of 109.200 set the previous day when the S&P 500 and the Dow posted their biggest declines since April 6.

While the weakening by equities was supportive for the yen, often sought when stocks fall due to its perceived safe-haven status, analysts said the dollar was still likely headed for further gains in the longer term.

"At first glance, the situation is similar to February, when US yields rose sharply and equities tumbled. But the difference this time is that the response by equities is more measured, and yen demand stemming from 'risk off' is not nearly as strong," said Yukio Ishizuki, senior currency strategist at Daiwa Securities in Tokyo.

"The market's attention is firmly back on interest rate differentials and this is likely to keep supporting the dollar going forward." The spreads between US yields and those of its European and Japanese counterparts have widened significantly amid diverging monetary policy expectations.

This week the gap between US and German 10-year government bond yields has hit its widest in 29 years and the US-Japanese 10-year yield spread reached its broadest in nearly 11 years.

The 10-year Treasury yield rose to 3 per cent on Tuesday, reflecting the durability of the US economic expansion. Accelerating inflation and concerns about increasing debt supply have also driven yields higher.

Wall Street dropped sharply on Tuesday as warnings by bellwether companies of higher costs stemming from the surge in yields reverberated.

The pound was 0.05 per cent higher at US$1.3989, crawling away from a one-month low of US$1.3919 plumbed on Tuesday.

The Australian dollar traded at US$0.7596 following a descent to a four-month trough of US$0.7576 the previous day.

The New Zealand dollar extended losses and dipped to US$0.7105, its weakest since Jan 4.

REUTERS