Euro bounces as US dollar's rally stalls

London

THE dollar's rally paused on Thursday as Treasury yields dipped and traders looked to US consumer price data later in the day that could show an acceleration in inflation.

Ten-year Treasury yields, which have been pushing the greenback higher, slid back below the psychologically important 3 per cent level to stop the dollar in its tracks after a three-week long rally.

The dollar index fell 0.2 per cent against a basket of six major currencies at 92.88 after hitting a 41/2-month high of 93.42 on Wednesday.

A weakened dollar helped lift the euro above a 41/2-month low of US$1.1823 on Wednesday. The euro had fallen in six of the last seven sessions, and on Thursday was last trading 0.3 per cent on the day at US$1.1890.

There has been little respite for investors this week with tensions between Israel and Iran flaring after US President Donald Trump exited from an international nuclear accord with the Islamic Republic.

A three-week-long rally for the US currency, which on Monday rose to its highest levels this year, reversing several months of weakness, has caused the unwinding of popular long bets on emerging market and G-10 currencies.

In the aftermath of Mr Trump's announcement on the Iran nuclear deal, oil continued to rally on Thursday although the gains being made were slowing.

"Markets are firmly focused on interest rates today," said Ulrich Leuchtmann, head of FX strategy at Commerzbank.

"Despite the US exit from the Iran nuclear deal, we're looking at a broadly risk-off environment...Interest rate differentials get to decide where the dollar goes next."

US consumer price data due at 1230 GMT are expected to show that annual core CPI inflation rose to 2.2 per cent in April, which would be the highest in more than a year, from 2.1 per cent in March.

Analysts are divided over whether the rally for the US currency will continue.

"It is our view that the broad-based rebound in the USD has further to run," said analysts at Rabobank.

But Societe Generale's European economist, Klaus Baader, said that the US interest rate yield curve, an important indicator of dollar strength, was falling and that would make the greenback's bounce transient.

The British pound on Thursday fell after the Bank of England kept interest rates on hold and cut its forecasts for growth. REUTERS