Greenback rallies to 7-week high as bond yields rise

London

THE US dollar rallied to a seven-week high on Monday after a rise in the 10-year US Treasury yield to within a whisker of the psychologically important 3-per cent level prompted buying of the greenback, leaving the euro and yen sharply lower.

Rising US bond yields have not always fed through to a higher US dollar in 2018 as US political uncertainty and geopolitical tensions have sometimes caused a breakdown between interest rates and currency performance.

But with the 10-year Treasury yield closing in on 3 per cent and the gap between US and German government bond rates at a 29-year high, the US dollar was bought across the board.

Analysts and investors say that should Treasury yields push past 3 per cent, that would signal the start of a bear market for bonds and produce levels which have triggered market spasms in the past.

The rise in yields was spurred by worries about further inflationary pressures, but also by increases in US debt issuance, signs of a thawing of relations between the United States and China, and North Korea promising to suspend nuclear missile tests and instead pursue peace.

Against a basket of currencies the dollar index rose 0.5 per cent to 90.728, its highest level since March 1. The euro fell half a per cent to a 2-1/2 week low of US$1.2226, not helped by a survey showing business activity in April stabilising across the eurozone.

The euro had enjoyed a strong rally until February before finding itself stuck in a trading range with the US dollar after the European Central Bank (ECB) cautioned investors expecting it to raise rates sooner than expected.

Not all analysts are convinced the greenback can sustainably strengthen much from here, and many still back the euro to gain once there is clarity about eurozone monetary policy. The ECB holds its monetary policy meeting on Thursday.

The rise in bond yields also weakened Asian emerging market currencies versus the US dollar, with the Chinese yuan and Korean won down and the Indonesian rupiah hitting a two-year low of 13,895 per US dollar.

The Australian dollar skidded to its weakest since Dec 14, falling to as low as US$0.7634 before recovering slightly to US$0.7643, while sterling and the Canadian and New Zealand dollars also dropped.

The yen slumped 0.6 per cent to 108.28 yen per US dollar, its weakest since Feb 13. REUTERS