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CURRENCIES

Euro slips to two-week low as US yields rise

London

THE US dollar gained broadly on Monday as widening US Treasury yields and expectations of more fiscal stimulus lifted the greenback against its rivals, with the euro falling to a two-week low.

President-elect Joe Biden, who takes office on Jan 20 with Democrats able to control both houses of Congress, has promised "trillions" in extra pandemic-relief spending.

Ordinarily, the extra spending plans would force investors to worry about rising inflation and its detrimental impact on the US dollar in a weak economy but the currency has been supported in recent weeks thanks to rising US yields.

Measured in inflation-adjusted terms, US 10-year real Treasury yields are rising faster than their European counterparts. As a result, the euro fell to US$1.2167, its lowest since Dec25, after climbing to US$1.2349 last week.

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"It is hardly surprising that the recent acceleration in real US yields has reminded the FX markets to end its focus on inflation and to assume a more comprehensive approach in its dollar valuation," Commerzbank strategists said in a note.

"That means: things are not looking so bad for the US dollar at present that EUR-USD levels of 1.2350 and above would currently be justified." The nominal yield on benchmark 10-year US debt is up more than 20 basis points to 1.1187 per cent this year, helping the US dollar to rise to a one-month high of 104.20 against the Japanese yen.

The US dollar index has lost roughly 12 per cent since a three-year peak in March. However, it is now more than 1.3 per cent above the almost three-year low it hit last week. It rose 0.1 per cent to 90.418 on Monday.

"Everyone's asking whether this changes the weaker dollar narrative - that's why I think we're getting a bit of a continuation of what we're seeing on Thursday and Friday," said National Australia Bank's head of FX strategy, Ray Attrill.

That has also prompted some investors to trim their bearish bets versus the US dollar with net short bets on the greenback versus the euro declining to US$21 billion compared to US$24 billion two weeks earlier, according to latest positioning data.

Elsewhere, the hitherto soaring Australian dollar fell nearly one per cent to US$0.7693, unmoved by another solid month of local retail sales. The US dollar also rose 0.2 per cent to 6.4864 yuan after weak factory gate prices in China. REUTERS

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