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Dollar on defensive after dropping from nearly 3-month high

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The U.S. dollar index, which measures the currency against six major rivals, was flat at 104.14, following Tuesday’s 0.29% decline

The dollar remained under pressure on Wednesday after pulling back from a nearly three-month high against the euro in the previous session with a decline in U.S. bond yields adding to the drag.

Analysts pointed to technical factors for the dollar’s retreat, following a two-day rally of 1.4% against the euro after unexpectedly strong U.S. jobs data and more hawkish rhetoric from Federal Reserve Chair Jerome Powell scuppered bets for an early interest rate reduction.

U.S. Treasury yields also dropped from highs overnight on solid demand at a sale of new three-year notes, removing some support for the dollar.

The dollar was little changed at $1.0755 per euro in early Asia trade on Wednesday, after dropping 0.1% on Tuesday, when it had earlier hit the highest level since November 14 at $1.0722.

The U.S. dollar index – which measures the currency against six major rivals, including the euro – was flat at 104.14, following Tuesday’s 0.29% decline. It had hit the highest since November 14 at 104.60 on Monday.

The U.S. dollar can be excused for being the weakest forex major on Tuesday, as it simply looks like a retracement against that bullish two-day move between Friday and Monday, said Matt Simpson, senior market analyst at City Index.

But let us not lose sight of the fact that the U.S. dollar index retains a bullish daily structure, and a pullback could set it up for the next leg higher, he added.

The dollar was stable at 147.905 yen, after slipping 0.49% overnight. The currency pair tends to be highly sensitive to moves in Treasury yields.

Analysts and traders highlight next Tuesday’s U.S. CPI data as a key test for rate bets.

Traders are currently pricing in a 19.5% probability of a cut in March, according to the CME Group’s FedWatch Tool, compared with a 68.1% probability at the start of the year.

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