Dollar gains as investors bet on strong US recovery

NEW YORK: The dollar advanced against major currencies on Tuesday, climbing to a one-year high versus the yen, as increasing US vaccinations and a major stimulus package backed expectations of a strong recovery from the pandemic, lifting Treasury yields.

Benchmark 10-year Treasury yields rose to 14-month highs on Tuesday at 1.776%, and were last slightly up on the day at 1.727%.

Treasury yields hit new highs a day before President Joe Biden is set to outline how he intends to pay for a $3 trillion to $4 trillion infrastructure plan.

The dollar index rose above the 93 mark and was last up 0.4%at 93.294. It hit a high of 93.357, its highest level in four months.

"US economic optimism has been the biggest driver this whole time with the move from 89 in the dollar index to 93," said Erik Nelson, macro strategist at Wells Fargo in New York.

"There is a bit of momentum behind the move. We have broken some key technical levels in some of the key currencies, including the dollar index," he added.

The dollar index has risen in five of the last six sessions.

Tuesday's US data further supported the upbeat outlook on the world's largest economy. Reports showed that US consumer confidence climbed in March to its highest level since the start of the COVID-19 pandemic, while housing prices soared year-on-year in January.

The safe-haven dollar also found some support as investors digested the fallout from the collapse of highly leveraged investment fund Archegos Capital.

The greenback also rose above 110 yen, a level not seen since March last year, and was last up 0.5% on the day at 110.35 yen.

The greenback was on track for its best month since late 2016.

Analysts said the yen was also vulnerable to higher inflation expectations in the United States than in Japan and a rise in long-term US yields. The dollar/yen pair typically has a positive correlation with long-term US yields.

The euro, meanwhile, weakened to $1.1711, its lowest level since early November. It was last down 0.4% to $1.1715.

Tougher coronavirus curbs in France and Germany dimmed the short-term outlook for the European economy. A widening spread between US and German bond yields is adding pressure on the euro.

The spread between US and German 10-year yields has widened the most since January of last year.

Investors will watch closely the monthly US nonfarm payrolls on Friday, with Federal Reserve policymakers so far citing slack in the labor market for their continued lower-for-longer stance on interest rates.

"In a week when the market is feeling so optimistic about the forthcoming payrolls release, it seems very likely that the greenback will find strong support," Rabobank currency strategist Jane Foley wrote in a report.

However, "the market is in danger of pricing in too much inflation risk," meaning "we see scope for the US dollar to soften in the months ahead," the report said.