Sliding govt bond yields pressure US dollar, euro

London

THE euro was stuck near two-week lows on Thursday and the US dollar drifted away from recent highs as sliding government bond yields pressured both currencies.

The global bond rally has accelerated this week on expectations of more monetary easing from central banks, although the impact on foreign exchange markets has been limited, with volatility remaining low.

Markets were closed in the United States on Thursday for its Independence Day.

Adam Cole, an FX strategist at RBC Capital Markets, said that while the big drop in US Treasury yields was negative for the US dollar, the outright yield advantage the US enjoyed over other countries was supporting demand for the greenback and minimising the spillover into higher volatility.

"The dollar isn't falling much compared to how much US yields are coming down. It's explained by the level of yields rather than the rate of change," he said.

The euro traded slightly higher at US$1.1286. It has weakened since IMF managing director Christine Lagarde, perceived as a policy dove, was nominated as the next European Central Bank president.

The US dollar index was marginally lower at 96.734.

The US dollar has weakened in recent weeks as expectations build for a Federal Reserve rate cut later this month, although the index is off three-month lows of 95.843 plumbed in June.

Waning expectations for a quick resolution to the US-China trade row have also hurt sentiment towards the US dollar.

Adding to a sense of unease about trade talks, US President Donald Trump on Wednesday repeated his view that China and Europe are manipulating their currencies.

But the US dollar remains the dominant reserve currency.

International Monetary Fund data released recently showed the dollar constituted 58 per cent of global foreign exchange reserves in the first quarter of 2019, up marginally from the previous quarter and far above the euro's 19 per cent share.

The focus now shifts to US non-farm payrolls data due on Friday, which economists expect to have risen by 160,000 in June, compared with a rise of 75,000 in May.

Some analysts think the US dollar will hold its own in the coming months, although the Japanese yen could act as a decent hedge should the rally in global stocks come to an end. REUTERS