Dollar dips as US yields fall, German politics supports euro

NEW YORK: The dollar remained under pressure on Tuesday, just off a two-month low against a basket of major currencies, hurt by a drop in US yields at time when hopes of more spending in Germany are keeping euro zone rates elevated.

That outweighed, at least for now, some dollar-supportive safe haven flows seen in Asia trade after US President Donald Trump said tariffs on Mexico and Canada would proceed as planned, though they were keeping investors on edge.

The euro was last up 0.3% at $1.0497, and the pound also firmed 0.2% to $1.2654. That left the dollar index down 0.25% at 106.45, just off Monday’s two-month low. Part of the reason for the softer dollar was a decline in US yields. The benchmark 10-year yield was last down 7 basis points at 4.32%, its lowest since mid-December, building on a move the previous day, as investors turn more nervous about the health of the US economy.

In contrast, euro zone benchmark 10-year German Bund yields were flat at 2.47%. Growing signs that Germany could approve a boost in defence spending before the outgoing parliament steps down, likely requiring more borrowing, were keeping German rates high. The gap between German and US 10-year yields was last at 185 bps, its widest in the euro’s favour since November. Developments in Germany also prompted Deutsche Bank’s head of FX research, George Saravelos, to revise on Tuesday his bearish view on the euro against the dollar to neutral. He had previously been bearish, despite the rally in Treasuries, because “the outcome of the German election was not conducive to a quick easing of the German fiscal stance”.

“Over the last 24 hours, however, the newsflow has changed dramatically,” he said, adding he now saw potential positives for the euro from a more proactive German fiscal stance. TARIFFS However, Saravelos said he was only neutral on the currency and that he still saw potential risks from additional disruption from trade and tariffs. They were the other factor in the mix on Tuesday after Trump on Monday said that tariffs on Canadian and Mexican imports were “on time and on schedule” despite efforts by the two countries to beef up border security and halt the flow of fentanyl into the US ahead of a March 4 deadline. The market impact was fairly muted - with some analysts suggesting this was because Trump was attempting to improve his negotiating position - though the Canadian dollar did weaken slightly.

The dollar rose to a one-week high of C$ 1.428 but was still well off the C$1.4792 per dollar it reached on February 3, in the aftermath of Trump’s initial announcement of tariffs on Canada. Options markets also hiked expectations of the volatility they expect for the Canadian dollar to their most in two weeks, but again levels were well short of those at the start of the month.