Dollar rally runs out of puff as yields ease

SINGAPORE: The dollar nursed losses on Wednesday as a retreat in US yields sapped momentum from its recent rebound and investors cautiously resumed bets that it can resume sliding.

Benchmark 10-year Treasury yields fell nearly 7 basis points from a 10-month high hit on Tuesday and the turnaround snuffed out a three-day streak for the dollar.

Against the euro, it posted its sharpest daily fall in more than a month and it dropped more than 1% against the pound, which was also boosted by the Bank of England governor talking down the prospect of negative rates.

The Australian and New Zealand dollars rose from one-week lows, lifting the Aussie above 77 cents again to sit at $0.7680 and the kiwi over 72 cents to trade at $0.7226.

The dollar fell through 104 Japanese yen to trade at 103.63 yen on Wednesday and the Chinese yuan also held gains to begin the day at a one-week high in offshore trade.

The moves press the dollar back toward multi-year lows, although it clung above those levels in Asia as the bounce this week has tempered some traders' confidence in the consensus view that US trade and budget deficits will drive it lower.

"The upward correction in the dollar index looks to be over and the downtrend has resumed," ANZ analysts said in a note.

"But with US asset markets in the driving seat, with equities setting the scene for risk appetite and US bonds leading the way in interest rate markets, it's worth asking if we can take dollar weakness for granted."

The euro steadied at $1.2208 and dollar index was steady at 89.991 on Wednesday after falling 0.5% on Tuesday. Sterling hit a week-high of $1.3680.

The bond-market selloff that has driven US yields sharply higher this year and stalled the dollar's decline was triggered by Democrats winning control of US Congress at elections in Georgia last week.

Investors expect to usher in huge sums in government borrowing to fund big-spending stimulus plans and have figured that higher US rates might make dollars more attractive.

However, strong demand at a $38 billion 10-year auction overnight and comments from US Federal Reserve officials reiterating that monetary policy is going to stay supportive seem to have once more turned the blowtorch on the greenback.

"The market hasn't given up on the short dollar, lower real yields, long reflation assets trade just yet," said Chris Weston, head of research at broker Pepperstone in Melbourne.

December US inflation figures are due at 1330 GMT and, after Kansas City Fed President Esther George said overnight she does not expect the Fed to react if inflation tips over its 2% goal, it may take a large surprise to unnerve investors.