The Australian and New Zealand dollars suffered a mild setback on Wednesday after a sharp, and sudden, rise in Treasury yields forced a squeeze on short US dollar positions overnight. The Aussie had eased off to $0.7817, from a top of $0.7865 on Tuesday, but was finding support around $0.7800.
Likewise, the kiwi had edged down to $0.7160, having briefly touched a three-month peak of $0.7197 the day before. The US dollar got a lift after yields on 10-year Treasury paper spiked above a major chart level at 2.50 percent to hit a 10-month peak at 2.55 percent.
The move sparked speculation that a decade-long bull run for bonds was finally at an end and US yields were set for a sustained rise, something dollar bulls have long yearned for. In debt markets, Australian bonds tracked the losses in Treasuries with three-year bond futures down 2.5 ticks at 97.840. The 10-year contract shed 5 ticks to 97.2750.
Yields on New Zealand government bonds also rose between 3 and 5 basis points across the curve. While the Federal Reserve raised overnight rates last year as projected, long-term yields stayed stubbornly low and undermined the positive impact on the US currency.
Events in China also gave a boost to the US dollar after China's central bank loosed controls on its yuan, which was promptly fixed at a two-week low. Investors often use the Aussie as a liquid proxy for China plays and some responded by shorting the Aussie in anticipation of further yuan weakness.
Yet the Aussie was not without support as commodity prices remained buoyant. Oil prices climbed to the highest since 2014, leaving Brent crude up 56 percent from its 2017 trough. That was a boon for Australian exports of liquefied natural gas, the price of which is tied to crude prices.
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