Euro near two-week low vs dollar as Treasury yields rebound

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[August 20, 2019]  By Olga Cotaga

LONDON (Reuters) - The euro hovered near a two-week low against the dollar on Tuesday as higher Treasury yields the day before boosted the U.S. currency. Political uncertainty in Italy also held the euro back.

Yields on U.S. benchmark 10-year government bonds <US10YT=RR> pulled away from three-year lows on Monday, helped in part by the prospect of Germany ditching its balanced budget policy and China providing more economic support measures.

Gains also came after Boston Fed President Eric on Monday criticized further rate cuts by the Federal Reserve, as well as from a Trump administration decision to extend a temporary license for Chinese telecoms producer Huawei, analysts said.

Market focus is likely to shift now to the annual symposium of global central bankers that begins on Friday at Jackson Hole, Wyoming, but analysts doubt that will limit demand for dollars.

"Ahead of the Jackson Hole summit later this week, there seems little reason for the dollar to weaken," said Lee Hardman, currency analyst at MUFG.

The Treasury yield curve inverted last week, a signal of impending recession that sent alarms through financial markets. The curve of two-year and 10-year Treasury yields remained steeper on Tuesday <US2US10=RR>.

The dollar index was flat at 98.375 <.DXY> after earlier rising to a two-and-a-half-week high of 98.40. It reached its 2019 high of 98.932 at the beginning of the month.

The euro was also flat at $1.1078 <EUR=EBS>, but not far from Friday's $1.1066 low, amid concern over political developments in Italy. Against the Swiss franc, the euro was down by 0.2% at 1.0855 <EURCHF=EBS>, near the two-year low of 1.0836 it reached last week.

In Italy, Prime Minister Giuseppe Conte will address parliament at 1300 GMT on Tuesday to defend his record. He might resign immediately afterwards, or he might wait for a formal vote to make it clear he is being unseated by the League. A vote has not been scheduled and there is widespread uncertainty over how the political turmoil will end.

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U.S. Dollar and Euro notes are seen in this June 22, 2017 illustration photo. REUTERS/Thomas White/Illustration

Deputy Prime Minister Matteo Salvini pulled the plug on the ruling coalition earlier this month, hoping to trigger early elections that would probably see him named prime minister.

"The possible success of the no-confidence vote in Italy today could push euro/dollar toward and even below the psychological 1.1000 level today," said Chris Turner, head of forex strategy at ING.

Declines are unlikely to persist, he said, "because the negative spillover into the euro from periods of political uncertainty in Europe has been somewhat limited over the past year."

Elsewhere, a stronger dollar pushed the offshore Chinese yuan lower, matching a six-day low of 7.0770. The offshore yuan was last trading neutral at 7.0702 <CNH=EBS>.

The pound was down by 0.5% both against the dollar and the euro, last at $1.2076 <GBP=D3> and at 91.77 pence against the euro <EURGBP=D3>.

British Prime Minister Boris Johnson made new waves by writing to European Council President Donald Tusk on Monday to propose replacing the Irish backstop with a commitment to put in place alternative arrangements by the end of a post-Brexit transition period.

Johnson will meet both French President Emmanuel Macron and German Chancellor Angela Merkel during the week and is also planning to meet Irish Prime Minister Leo Varadkar in September.

(Graphic: DXY index rises towards 2019 high link:

(Reporting by Olga Cotaga; editing by Larry King)

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