The dollar set a three-month high against a basket of currencies on Tuesday, having gained a boost as the U.S. 10-year Treasury yield climbed toward the psychologically key 3 percent level.
The U.S. 10-year Treasury yield hit its highest in more than four years at 2.998 percent on Monday, driven by worries about the growing supply of government debt and inflationary pressures from rising oil prices.
The U.S. 10-year bond yield later backed off that level and stood at 2.964 percent in Tuesday’s Asian trade.
Yields have also risen at the short end of the curve, with the U.S. 2-year yield having reached a high of 2.483 percent this week, the highest since September 2008.
As a result, U.S.-Japan and U.S.-German yield differentials have recently widened in the dollar’s favor, leaving the yen and the euro lower.
“The U.S. dollar has put on a compelling show…as the stars align on the back of higher U.S. yields,” Stephen Innes, head of trading in Asia-Pacific for Oanda in Singapore, wrote in a note.
“While it’s a bit early for investors to pack in the consensus short dollar view, the weaker shorts are indeed getting pared,” he added.
The dollar’s index against a basket of six major peers rose to as high as 91.076, its strongest since Jan. 12. The dollar index was last steady on the day at 90.929.
The dollar set a two-month high of 108.87 yen and last stood at 108.82 yen, up 0.1 percent on the day.
On Monday, the dollar had surged nearly 1 percent for its biggest daily percentage rise in almost a month, gaining added steam after breaching the 108 yen level.
“The break of 108 triggered a lot of stops and buying interest on the options market as well,” said Tareck Horchani, head of sales trading in Asia-Pacific for Saxo Markets in Singapore, referring to the dollar’s jump on Monday.
The yen, a safe haven currency that tends to rise in times of economic uncertainty but weakens when investor confidence returns, has come under pressure in recent sessions as worries over geopolitical risks and global trade tensions eased.
U.S. Treasury Secretary Steven Mnuchin said on Saturday he may travel to China, a move that could ease tensions between the world’s two largest economies.
The euro held steady at $1.2209, having pared its losses after falling to $1.2185 earlier on Tuesday, the lowest for the common currency since March 1.
The rise in U.S. bond yields has dented emerging market currencies and bond markets, including those in Asia.
Higher U.S. yields can put pressure on the currencies of emerging market countries that run current account deficits such as Indonesia and India, said Satoshi Okagawa, senior global markets analyst for Sumitomo Mitsui Banking Corporation in Singapore.
Although its moves were subdued on Tuesday, the Indonesian rupiah briefly touched a two-year low of 13,898 per dollar.
In one-month non-deliverable forwards (NDFs), the rupiah hit a two-year low of 14,105 per dollar before regaining its footing.
Market participants said foreign investors may have been buying the dollar against the rupiah via NDFs in recent trading sessions to hedge against the risk of further dollar appreciation.