US dollar clings to three-week highs as yields steady

London

THE US dollar held on to three-week highs against major currencies on Monday as US and euro zone bond yields steadied, after a fixed-income sell-off in February that lifted demand for safe-haven currencies.

The Australian dollar and other riskier currencies rebounded against the US dollar during trading hours in Asia, but the greenback gradually strengthened against peers.

At 11.49am GMT, the US dollar index was up 0.35 per cent to 91.07 after posting its biggest gains since June on Friday.

The euro fell 0.23 per cent to US$1.2042, after dropping 0.9 per cent at the end of last week - the most since April. A survey showing upbeat euro zone factory activity in February and soaring demand failed to prop up the bloc's currency.

"It's quite possible that the market is re-adjusting the bullish view it had on the euro at the beginning of the year", said Jane Foley, a foreign exchange strategist at Rabobank.

She noted concerns about Europe's vaccine campaigns and its growth potential while investors seeking to play the reflation trade focused on the recovering US economy and the new round of stimulus from US President Joe Biden.

Traders were also waiting for a speech later this afternoon by European Central Bank president Christine Lagarde, who is under pressure to act against rising yields in the euro zone. "There is little doubt in my mind that central banks will eventually lean quite hard against a sustained rise in yields," Deutsche Bank strategist Jim Reid told his clients in a note. "They simply can't afford to see it happen with debt so high."

Yields on the benchmark 10-year German government bond retreated to -0.30 per cent from a one-year high of -0.20 per cent last week.

Ten-year US bonds traded at 1.4376 per cent, off Thursday's one-year high of 1.614 per cent. "The bond market and risk assets are showing signs of stabilisation after the big sell-off last week", ING analysts commented, expecting that "the US dollar's corrective rally should pause for breath".

On Monday, the risk-friendly Australian dollar jumped 0.3 per cent to US$0.7728. The Reserve Bank of Australia will hold its monthly policy meeting on Tuesday. Markets expect it to reinforce its forward guidance for three more years of near-zero rates.

The British pound drew additional support from bets on a faster vaccine-led economic recovery. Sterling rose 0.17 per cent to US$1.3945. REUTERS