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Euro stumbles as yield rise supports US dollar


THE euro briefly flirted with US$1.24 on Thursday but a rise in long-term US bond yields supported the dollar and pushed the single currency further back into its recent trading range.

Given the scale of gains in the 10-year Treasury note yield , which climbed more than five basis points overnight for its biggest one-day surge since March 2, the dollar's strength was limited.

The modest moves underlined investor caution and that a rally in the euro, which gained at the start of this year, has run out of steam. Investors are growing nervous that the eurozone economy's rebound is nearing the top and the European Central Bank may move more slowly to tighten monetary policy.

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Broad uncertainty stemming from US President Donald Trump's trade and economic policies, as well as geopolitical events in the Middle East and elsewhere has meanwhile weighed on the dollar.

"There is no real impulse from monetary policy. There is a little bit of fatigue with the trade war issue and the global economic cycle is losing momentum, especially in the eurozone whereas the US is holding up," said Christin Tuxen, an FX strategist at Danske Bank.

The euro fell 0.1 per cent to US$1.2365 after earlier hitting US$1.24. The dollar index, measuring the US currency against a basket of currencies, traded flat at 89.644.

Tuxen remains bullish on the euro, seeing the single currency rise towards US$1.30 in 12 months but said in the short-term the euro could fall as the ECB, which meets next week, takes more time in raising rates.

With the US Federal Reserve tightening, diverging interest rate views have driven the spread between US and German 10-year government bond yields above 230 basis points, the highest since late December 2016.

The euro had weakened to a 14-year low the last time the yield spread was at the current width. But it has been relatively immune to the current yield spread widening. The spread has increased more than 30 basis points over the past three months, but the common currency has moved within a relatively narrow US$1.2556-US$1.2154 range.

"While we have been arguing that the dollar will take its cue from the US economic cycle - irrespective of what the Fed does - we do believe that the outlook for global asset prices in general now rests on what US monetary officials choose to do next," ING analysts said. REUTERS