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CURRENCIES

US dollar extends rising streak even as euro slips

London

THE US dollar edged higher against its rivals on Monday on the back of widening weakness in the euro, with a broad low volatility environment encouraging hedge funds to add to bullish bets.

While the Federal Reserve has pressed the pause button on its multi-year rate hike cycle, higher US bond yields in relation to peers means the interest rate advantage still lies firmly with the United States, especially against the backdrop of receding fears about the outlook of the global economy.

"Markets still view that the yield pick-up in the US is more than enough to compensate for the pause in policy tightening, but I would be wary of chasing the dollar higher if the global trade backdrop improves," said Ian Gunner, who runs a currency fund at Altana Wealth in London.

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The gap between benchmark 10-year yields in the US and Germany has widened to a near three-month high of 257 basis points, compared with 240 basis points at the start of the year. That rise in yields has come amid falling market volatility, especially in currency markets which has enhanced carry trade-seeking strategies involving borrowing in a low yielding currency such as the yen or the euro and buying a higher-yielding one such as the US dollar. Three-month implied volatility in the Japanese yen, a gauge of expected swings in the currency versus the US dollar over three months, has flattened to 4 1/2-year lows.

Hopes that some of the world's major central banks would raise interest rates this year have faded in recent weeks amid tepid economic data. Some analysts now expect a fresh round of bank funding at a European Central Bank (ECB) meeting later this week that would boost the US dollar.

The US dollar traded at 111.96 yen, near a 10-week high of 112.08 on Friday. Against a basket of its rivals, the US dollar was a shade higher at 96.62. It rose 0.4 per cent in February, its biggest monthly rise since October 2018.

Much of the weakness in the London session coincided with a broadly weaker euro. The single currency slipped across the board, falling 0.3 per cent against the US dollar and 0.2 per cent against the euro.

Reports that the US and China might reach a formal agreement at a summit around March 27 is pushing stocks higher and prompting traders to buy the Chinese yuan and other proxy currencies. The yuan ticked up 0.25 per cent to 6.6986 to the US dollar in offshore trade, near last week's 7 1/2-month high of 6.6737. REUTERS