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Dollar firm on bets of faster economic recovery

economic recovery

The dollar index gained 0.2% to 91.176, reaching a three-week high

The dollar was firm against its peers on Tuesday on bets of a faster economic recovery in the US and expectations that the U.S. Fed will show greater tolerance of higher bond yields than other central banks.

Risk sensitive currencies dropped from sharp gains the previous day, as China’s top financial regulator discussed the need to stabilise the housing market, while expressing wariness of the risk of bubbles bursting in foreign markets.

The dollar index gained 0.2% to 91.176, reaching a three-week high to move closer to its February peak of 91.600.

The U.S. currency rose to 106.93 yen, its highest since late August, and stood at 106.78 yen at one point while the euro slipped 0.2% to $1.2026, hitting its lowest level in almost a month.

The jury is still out on whether the bond market sell-off is over. But people expect the Bank of Japan to keep a tab on bond yields, which means there will be a bigger yield premium for the dollar, said Kazushige Kaida, head of FX sales at State Street Bank’s Tokyo Branch.

The euro was under pressure as top officials from the ECB sounded alarm over rises in bond yields.

President Christine Lagarde said the ECB will prevent a premature increase in borrowing costs for firms and households.

Policymaker Francois Villeroy de Galhau was even more explicit, saying some of the recent rises in bond yields were unwarranted and that the ECB must push back using the flexibility embedded in its bond purchase programme.

Traders were quick to sense the marked difference in tone between the ECB and the Federal Reserve.

Richmond Federal Reserve President Thomas Barkin said on Monday the uptick in long-term bond yields so far seems to suggest an adjustment to stronger growth and inflation outlook.

Atlanta Fed President Raphael Bostic said last week that bond yields remain comparatively low, while Federal Reserve Chair Jerome Powell has not appeared unduly concerned by rising bond yields.

Central banks continue to take diverging views on the signals sent by the recent rise in yields. The U.S. Fed is taking it as a positive signal, Tapas Strickland, director of economics and markets at National Australian Bank in Sydney, said in a note.

The U.S. economic recovery is reckoned to be on firmer ground, on prospects of a $1.9 trillion fiscal stimulus package and successful COVID vaccinations.

According to a survey by the Institute for Supply Management (ISM) released on Monday, U.S. manufacturing activity increased to a three-year high in February amid a surge in new orders.

On the other hand, the Australian dollar dropped 0.45% before erasing some losses to trade at $0.7766, after the Reserve Bank of Australia (RBA) re-committed to keeping interest rates at record lows.

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