February 21, 2018 / 4:11 PM / a year ago

FOREX-Dollar rises as short-term yields climb; Fed minutes awaited

* Euro down, PMIs weaker than expected

* Traders eye Fed minutes (Updates throughout to U.S. market open, changes dateline; previous LONDON)

By Saqib Iqbal Ahmed

NEW YORK, Feb 21 (Reuters) - The dollar rose on Wednesday, extending its recovery from a three-year low last week, helped by buoyant short-term Treasury yields, and as traders awaited the release of minutes of the Federal Reserve’s recent policy meeting that could offer clues on the pace of future interest rate hikes.

The dollar index, which measures the greenback against a basket of six major currencies, was up 0.14 percent at 89.838, after hitting a one-week high of 89.998 earlier in the session.

“Short-term Treasury (yields) have moved up fairly significantly overnight, reaching levels we had seen last during the Lehman crisis,” said Sireen Harajli, a currency strategist at Mizuho in New York. “This higher push in yield has been beneficial for the dollar.”

The yield on the two-year Treasury note was at 2.262, after hitting a nine-year high of 2.282 earlier in the day.

The dollar sold off in recent months on worries that the Trump administration’s recently passed tax cuts and plans for large government spending would expand the deficit and worries that the U.S. government is pursuing a weak-dollar strategy.

The dollar index, which hit a more than three-year low of 88.253 last week, is up 0.8 percent this week, with analysts pegging part of the strength to profit-taking in other currencies.

“The market seems to be turning a little bit more cautious against shorting the dollar too aggressively,” Harajli said.

The euro edged lower after the release of February’s preliminary purchasing managers’ survey implied the pace of growth set in January, the fastest in well over a decade, has lost a little momentum in February.

The euro has been driven by dollar weakness and then the recent recovery, but investors remain long on the currency in anticipation the European Central Bank will soon begin unwinding its balance sheet.

“The euro remains under pressure but that is more of a USD recovery story than anything else,” Brad Bechtel, managing director FX at Jefferies, said in a note.

Traders will be parsing U.S. Federal Reserve minutes due later on Wednesday for hints on the future pace of U.S. monetary tightening after worries about rising inflation rattled markets in recent weeks.

Sterling bounced off one-week lows against the greenback after Bank of England policymakers struck a hawkish tone on inflation and interest rates in testimony to parliament. The British pound was 0.14 percent lower at $1.3975.

The Canadian dollar weakened to a nearly two-week low against its U.S. counterpart as oil prices fell.

Reporting by Saqib Iqbal Ahmed; editing by Jonathan Oatis

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