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The
dollar had hit a more than 2-1/2-year low in January after
sliding for months as ultra-dovish policy from the Federal
Reserve encouraged investors to seek alternative currencies.
But expectations for a wave of spending under an incoming Joe
Biden administration have pushed Treasury yields higher, with
the 10-year yield reaching a 10-month high on Tuesday. The
dollar has bounced 1.5% since last Wednesday.
Not only have markets brought forward bets on Fed interest rate
increases to 2023, many also reckon it could start withdrawing,
or tapering, asset purchases earlier.
The dollar index, which measures the greenback against a basket
of currencies, was unchanged at 90.438, above lows of 89.206 hit
last week.
Graphic: U.S. dollar index
https://fingfx.thomsonreuters.com/
gfx/mkt/bdwpkqoogpm/dollar%20jan%2012.PNG
Against the euro, the dollar stood still at $1.2153.
The support from rising yields has so far trumped worries that
the extra spending could trigger faster inflation. But many
analysts expect the dollar to resume its decline as stimulus
spending and vaccine rollouts brighten the global economic
outlook.
ING analysts said Fed officials due to speak later on Tuesday
were likely to pour cold water on any suggestion of slowing
monetary stimulus support.
"Any policy-related comments should – in our view – go in the
direction of ruling out any unwinding of monetary stimulus in
the foreseeable future," they said.
"With the Fed’s rate expectations firmly at the bottom, any
further rise in U.S. yields will remain a function of rising
inflation expectations or term premium, which leaves us
confident on our bearish-dollar call."
Morgan Stanley, however, has recommended a neutral view on the
dollar. It has closed a dollar-bearish trade versus the euro and
the Canadian dollar and removed its bullish view on emerging
market currencies, in part because U.S. real rates are likely "troughing".
Most emerging market currencies rose on Tuesday, including the
offshore yuan, Mexican peso and South African rand.
With equity markets back in a bullish mood, riskier developed
market currencies such as the Australian and New Zealand dollars
also rose. Both gained about 0.4% <AUD=D3.
Bitcoin stabilised at around $35,500 after Monday's huge drop.
The cryptocurrency's rally has faltered since it soared to a
record high of $42,000 on Jan. 8.
(Editing by Larry King and Pravin Char)
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