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CURRENCIES

US dollar, Swiss franc struggle as bond yields drop

London

THE dollar struggled to build on its gains from last week on Monday while investors piled into riskier assets led by Scandinavian currencies, encouraged by a drop in bond yields in peripheral countries in Europe such as Italy.

Perceived safe-haven currencies in Europe such as the Swiss franc tumbled half a per cent against the dollar and the euro as Italian bond yields dropped on hopes that the new government would be prudent with its fiscal policies.

The Italy/Germany 10-year bond yield spread shrank to 234 basis points on Monday, its tightest level in six weeks, and 55 bps below last week's widest levels.

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"The markets believe that 250 basis points between 10-year German and Italian bonds are a key level for euro/franc and the easing of concerns over the Italian budget is helping," said Kenneth Broux, a currency strategist at Societe Generale.

Against a basket of its rivals, the dollar was broadly flat at 95.36 after rising 0.23 per cent last week, its biggest rise in three weeks.

Its losses were more pronounced against the Swedish kronor and the Norwegian kroner against which it lost 0.1 and 0.6 per cent respectively.

The Swedish kronor, which has been the worst performing currency among the majors, strengthened after gains for the far right in Sunday's vote were smaller than some polls had predicted - even though the country faces weeks of uncertainty as it tries to form a government.

The Norwegian kroner surged after August inflation data firmed expectations for a central bank rate hike next week.

Against the euro, the kroner rose 0.8 per cent and was set for its biggest daily rise in more than four months.

Overall dollar positions saw their biggest drop in nearly six months as investors took some profits from a rally that has seen the greenback gain more than 6 per cent since trade concerns shot into the spotlight.

An index for emerging market currencies fell 0.4 per cent to near one-week lows.

The Indian rupee fell to a record low while the Hong Kong dollar hit the lower end of a trading band.

"We have had strong US jobs data which has cemented market expectations of at least two more rate hikes this year and that doesn't bode well for emerging markets," said Piotr Matys, a markets strategist at Rabobank in London.

US jobs growth accelerated in August and wages notched up their largest annual increase in more than nine years, boosting the prospect of faster interest rate rises by the Federal Reserve. REUTERS