U.S. Markets

Dollar climbs as U.S. 10-year bond yield flirts with 3 percent

NEW YORK (Reuters) - The U.S. dollar rallied to a four-month high on Monday as the 10-year Treasury yield’s climb toward the psychologically important 3 percent level spurred buying of the greenback, leaving the euro and yen lower.

U.S. Dollar banknotes are seen in this photo illustration taken February 12, 2018. REUTERS/Jose Luis Gonzalez/Illustration

The 10-year yield hit its highest in over four years at 2.998 percent, driven by worries about the growing supply of government debt and accelerating inflation as oil and commodity prices climb. But although traders got close, the 3 percent barrier continued to hold late into Monday’s session.

The strong dollar also reflected an improved outlook on trade. U.S. Treasury Secretary Steven Mnuchin said on Saturday he may travel to China, a move that could ease tensions between the world’s two largest economies.

“The de-escalation of trade tensions favors the dollar in the short run, particularly against the euro and yen,” said Mark McCormick, North American head of foreign exchange strategy at TD Securities in Toronto, Canada.

Rising U.S. bond yields have not always fed through to a higher dollar in 2018 as U.S. political uncertainty and geopolitical tensions have sometimes caused a breakdown between interest rates and currency performance.

But with the 10-year Treasury US10YT=RR yield closing in on 3 percent and the gap between U.S. and German government bond rates at a 29-year high, the dollar was bought across the board.

Against a basket of currencies the dollar index rose 0.7 percent to 90.960 .DXY, its highest level since Jan. 18.

The euro fell by 0.7 percent to a two-month low of $1.2200 EUR=, not helped by a survey showing business activity in April stabilizing across the euro zone.

The euro had enjoyed a strong rally until February before finding itself stuck in a trading range with the dollar after the European Central Bank cautioned investors expecting it to raise rates sooner than expected. The ECB holds its monetary policy meeting on Thursday.

“I don’t think there’s going to be any change in policy this week. I think the tone might be a little more dovish, especially on the Euro. The last ECB minutes revealed a little bit more concern on the currency side,” said Sireen Harajli, currency strategist at Mizuho in New York.

The rise in bond yields also weakened Asian emerging market currencies versus the dollar, with the Chinese yuan CNH= and Korean won KRW= down and the Indonesian rupiah IDR= hitting a two-year low of 13,895 per dollar.

The Australian dollar skidded to its weakest since Dec. 13, falling to as low as $0.760 AUD=, while sterling GBP= and the New Zealand NZD= dollar also dropped.

The yen slumped 1 percent to a session low of 108.73 JPY= yen per dollar, its weakest since Feb. 13.

Reporting by Kate Duguid and Tommy Wilkes; Editing by David Gregorio