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US dollar rally falters as Treasury yields dip

London

THE US dollar's rally faltered on Tuesday as Treasury yields dipped after a broad surge in the currency prompted by easing US-China trade tensions.

The US dollar's index against a basket of six major currencies last traded at 93.414, down from a five-month high of 94.058 set on Monday.

US Treasury yields pulled back from last week's seven-year highs, encouraging traders to cash in bullish US dollar bets, said Gavin Friend, senior markets strategist at NAB in London. "It's been a hefty surge for the dollar, so this looks to me like a bit of profit-taking."

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The prospect on Monday of a resolution to the US-China trade conflict supported the US dollar. On Tuesday, China said it would cut import tariffs for automobiles, opening greater access to the world's largest auto market, in a further sign of easing trade tensions. But the US dollar floundered and was headed for its biggest daily loss in two weeks as the euro rebounded from the 4 1/2-month low of US$1.1717 it reached on Monday.

Before that, the US dollar had strengthened by 5.4 per cent since mid-February, its biggest gain since 2015. Investors who had taken big positions against the US dollar rushed to unwind and cover their positions, pushing it even higher.

The view that many parts of the global economy were expanding together had given the US dollar less of an edge over other currencies earlier this year. Over the past month, however, the greenback has been bolstered by generally solid US economic data that has reinforced expectations that the Federal Reserve would raise borrowing rates at least two more times this year. Investors will study the minutes of the US Federal Reserve's last policy meeting, due on Wednesday, for signs of whether the central bank is willing to accept above-target inflation for a time.

The US dollar has also strengthened against the euro amid political uncertainty in Italy. The country's anti-establishment 5-Star Movement and the far-right League on Monday proposed Giuseppe Conte as prime minister to lead their coalition government. The euro rose 0.3 per cent to US$1.1830, after earlier falling to its lowest level since around mid-November.

This week will bring about a further test for euro bulls with the release of preliminary PMI data for May on Wednesday. Markets are waiting to see whether Europe's first-quarter slowdown has spilled over to later months. REUTERS