Dollar regains footing as US yields stabilise

LONDON: The US dollar regained footing on Wednesday, clawing back some of its losses sustained overnight, as US bond yields stabilized following a drop from one-year highs.

Riskier currencies including the Australian and New Zealand dollars retreated after logging big gains on Tuesday. Bitcoin turned lower after earlier topping $55,000 for the first time since Feb. 22.

Against the yen, another traditional safe-haven currency, the greenback traded 0.3% higher at 108.80 yen, following its retreat from a nine-month peak of 109.235.

Investors will have their eye on US inflation numbers due later on Wednesday.

Traders are also wary bond yields could rise further this week as the market will have to digest a $120 billion auction of 3-, 10-, and 30-year Treasuries, especially after last week's soft auction and a 7-year note sale that saw a spike in yields.

"Particularly the latter (the 10-year auction today will be followed by a 30-year UST auction tomorrow) is the main risk to market sentiment today should low demand reinstate pressure on the fragile UST market," said ING strategists in a daily note.

"Equally, a good take-up could reiterate the risk-friendly mood in FX markets observed yesterday. Hence, one should get ready for a day of volatility with the FX market looking for signs of confirmation as to whether the risk rally yesterday was a short-term blip or the tentative start of a trend."

The dollar index has closely tracked a surge in Treasury yields in recent weeks, both because higher yields increase the currency's appeal and as the bond rout shook investor confidence, spurring demand for the safest assets.

The benchmark 10-year Treasury yield stabilised around 1.5630% on Wednesday in European trade after a three-day drop from a one-year high of 1.6250%.

The dollar index strengthened about 0.1% to 92.099, after retreating from a 3-1/2-month high of 92.506 the previous day.

Bond investors have been selling on bets that a faster-than-expected economic rebound would spark a surge in inflation, with President Joe Biden expected to sign a $1.9 trillion coronavirus aid package as soon as this week.

The euro was 0.1% lower at $1.18890.

The European Central Bank meets Thursday and one topic will dominate: what to do about rising sovereign bond yields which if left unchecked could derail efforts to get a coronavirus-hit economy back on track.

"Although the recent move in bond yields has not spared the euro zone, the tightening in financial conditions has been far less of a problem for the ECB given the different nominal starting point," said Geoff Yu, EMEA market strategist at Bank of New York Mellon.

"Furthermore, the dollar's consequent strength from higher US real yields represents a loosening in financial conditions for the euro zone and eases the pressure on the ECB to act. If anything, the ECB will hope to maintain the status quo for monetary policy in absolute and relative terms."

The Aussie weakened 0.4% to $0.7691 after jumping 1% overnight, as a top central banker rebuffed market chatter about early rate increases, helping pull local yields lower.

New Zealand's kiwi slipped 0.3% to $0.7153 following a 0.8% increase on Tuesday.

In cryptocurrencies, bitcoin traded flat at 54,910. It hit a record high of $58,354.14 on Feb. 21.