Dollar, franc struggle as bond yields drop

[September 10, 2018]   By Saikat Chatterjee

LONDON (Reuters) - 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 percent against the dollar and the euro as Italian bond yields dropped on hopes 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.

"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 percent last week, its biggest rise in three weeks.

Its losses were more pronounced against the Swedish crown and the Norwegian crown against which it lost 0.1 and 0.6 percent respectively.

The Swedish crown, 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 ties to form a government.

The Norwegian crown surged after August inflation data firmed expectations for a central bank rate hike next week. Against the euro, the crown rose 0.8 percent and was set for its biggest daily rise in more than four months.

A woman counts U.S. dollar bills at her home in Buenos Aires, Argentina August 28, 2018. Picture taken August 28, 2018. REUTERS/Marcos Brindicci/File Photo

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 percent since trade concerns shot into the spotlight.

An index for emerging market currencies fell 0.4 percent 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 U.S. jobs data which has cemented market expectations of at least 2 more rate hikes this year and that doesn't bode well for emerging markets," said Piotr Matys, a markets strategist at Rabobank in London.

U.S. 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.

(Reporting by Saikat Chatterjee; Additional reporting by Olof Swahnberg in Stockholm; Editing by Alison Williams)

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