April 24, 2018 / 3:09 PM / a month ago

FOREX-Dollar, euro hold after U.S. 10-year yield hits 3 percent

* 10-year Treasury yield hits 3 percent

* Markets expect a cautious note from ECB on Thursday

* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh (Updates news, analyst quotes)

By Kate Duguid

NEW YORK, April 24 (Reuters) - The U.S. dollar and euro were largely unchanged on Tuesday morning as the 10-year Treasury yield broke through the psychologically significant barrier of 3 percent.

The dollar index hit a three-month high of 90.985 against a basket of six currencies in morning trade, though the big gains on rising U.S. government bond yields mostly occurred yesterday.

“Yesterday was a big day in terms of Treasury yields impacting currencies. Today, the 10-year did claw its way up to 3 percent to no big effect as far as currencies are concerned,” said Alan Ruskin, global head of currency strategy at Deutsche Bank in New York.

Greenback gains on Tuesday drove the euro down slightly past the two-month low hit yesterday, on growing concerns that firmer U.S. Treasury yields would reduce incremental demand for the region’s bonds and stocks at a time when hedge funds have amassed record long bets in the single currency.

But after Monday’s sizeable fall, the euro looked buoyant on Tuesday, remaining well above the annual low reached in early January.

“Today we stalled at key levels, most obviously vis-à-vis the euro, which looks relatively resilient,” said Ruskin.

The U.S. 10-year Treasury yield rose above 3 percent on Tuesday for the first time in more than four years as investors reduced their U.S. bond holdings on worries about rising inflation and growing government debt supply. The 10-year reached a top of 3.003 percent, above yesterday’s close at 2.973 percent.

Some lingering worries that European Central Bank policymakers may signal a more cautious stance at a policy meeting on Thursday also pulled the single currency lower.

“We think the euro’s weakness may be overdone as despite the U.S. Treasury yield spike theme reverberating in the markets over the last 24 hours, the U.S. economy is very much in the late stages of its economic cycle and a cautious ECB meeting is baked into markets,” said Christin Tuxen, an FX strategist at Danske Bank in Copenhagen.

The single currency stabilised around $1.22 on Tuesday after having plumbed to a low of $1.2185 in the Asian session, its lowest since March 1. It has fallen 3 percent from a 2018 high above $1.2550 in mid-February.

The dollar set a 2-and-a-1/2 month high of 109.17 yen and was holding near those levels.

The rise in U.S. bond yields has dented emerging market currencies and bond markets, including those in Asia.

Higher U.S. yields can put pressure on the currencies of emerging market countries that run current account deficits such as Indonesia and India, said Satoshi Okagawa, senior global markets analyst for Sumitomo Mitsui Banking Corporation in Singapore.

A stronger dollar also intensified pressure on some commodity-linked currencies such as the Australian dollar which tumbled 0.4 percent to 0.7577 per dollar, its lowest since Dec. 13.

Reporting by Kate Duguid and Saikat Chatterjee Editing by Frances Kerry

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