US dollar weakens as US bond yields slip from recent highs

[NEW YORK] The US dollar slid against major rivals on Friday as investors took advantage of a minor pullback in US bond yields from recent highs and a holiday-shortened week to consolidate gains that had propelled the currency to a nearly 14-year peak.

Expectations of higher US inflation and interest rate hikes by the Federal Reserve have driven the greenback to a more than 6 per cent gain in the last two months, its strongest showing over a similar period since early 2015.

Most currency players expect the gains to continue. But the combination of the US Thanksgiving holiday, the processing of corporate flows before the month-end and perceived risks looming for markets in the first half of December led some to cash in gains now.

"The latest consolidation has many investors wondering if it's time to sell dollars," said Kathy Lien, managing director of FX strategy at BK Asset Management in New York.

"While there is no question that the dollar is getting ahead of reality and as tempting as it may be to pick a top, the latest pullback is small which means the better trade should be buying the dollar's dips until Fed Chair Janet Yellen tells us otherwise."

In afternoon trading on Friday, US 10-year Treasury yields were up slightly from the previous session at 2.359 per cent, but off from Thursday's 16-month high of 2.417 per cent.

US two-year yields slipped from a more than six-year high hit earlier in the session and were last at 1.130 per cent. The step-back in yields drove a modest selloff in the US dollar.

In early afternoon trading, the US dollar index fell 0.3 per cent to 101.42 after hitting an almost 14-month peak the previous session. The index posted its largest one-day fall since early November.

After hitting an eight-month high of 113.90 yen earlier, the US dollar was down 0.2 per cent against the yen at 113.11 yen, although it still ended the week with a 2 per cent gain.

The euro rose 0.5 per cent to US$1.0601 after dropping to US$1.0518 on Thursday, its lowest since March 2015.

Emerging market equities and currencies, meanwhile, have been hit hard by the spectre of a possible Fed rate hike and potential US trade protectionism under President-elect Donald Trump.

The Turkish lira slumped to a record low even after the country's central bank raised interest rates for the first time in nearly three years on Thursday. The lira was hurt as European Union lawmakers called for a temporary halt to EU membership talks with Ankara.

REUTERS