The dollar edged higher on Monday after two consecutive sessions of losses as hedge funds ramped up their holdings as widening concerns about the Chinese property sector and resilient US Treasury yields boosted the appeal of the greenback.
After spending the second quarter of 2021 on the back foot the dollar has received a fresh boost in recent weeks, climbing to its highest levels in a year against its rivals last week as top investment banks have revised up their forecasts.
Citigroup strategists expect more upside in the dollar due to challenges in the Chinese real estate sector, higher US yields not driven by a global economic recovery and the negative impact for energy importers.
Shares in embattled developer China Evergrande were halted in Hong Kong, rekindling market nerves about the possibility of contagion.
The dollar's gains were more pronounced against some of its top rivals with the greenback scaling a 14-month high on the euro and a 19-month peak versus the yen last week as markets reckoned US interest rates could rise ahead of global peers.
In early London trading on Monday, the euro dipped back below $1.16 and at $1.1598 is not far from last week's trough at $1.1563. Versus a basket of its rivals, the dollar edged 0.1% higher at 94.04, breaking a two-day losing streak. The offshore yuan weakened about 0.3%.
Latest weekly positioning data showed hedge funds have increased their dollar holdings against its rivals to its highest levels since November 2019.
Dollar firm as China Evergrande nerves resurface
The dollar's gains has also infused life in the moribund currency volatility markets with a gauge measuring daily swings rising to its highest levels in 2-1/2 months at 6.2%.
With Chinese markets shut for a holiday, traders attention will be firmly focused on monthly US jobs data on Friday that analysts believe will pave the way for US policymakers to strike a more hawkish tone. Yields on benchmark 10-year US Treasury debt were holding near their highest levels in more than three months at 1.47%.
Friday's US labour data is expected to show continued improvement in the job market, with a forecast for 460,000 jobs to have been added in September - enough to keep the Federal Reserve on course to begin tapering before year's end.
"The market senses that if US employment data stay robust in coming months, Fed rate hikes may not be too far behind an end to tapering in 2022," Credit Suisse strategists said in a quarterly outlook note.
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