The dollar hit a four-month high on Wednesday after a rise in benchmark U.S. Treasury yields above 3 percent rattled some currency bears while a mixed picture from business surveys failed to help the euro before a European Central Bank meeting.
Asian shares fell on Wednesday after a sharp sell-off in U.S. markets and warnings from U.S. companies of higher costs drove fears that a boom in corporate earnings may be near its peak when concerns of fiscal stimulus in a late U.S. economic cycle have pushed bond yields higher.
“With rising bond yields spoiling the fun and disappointment around the U.S. tech sector putting a dampener on sentiment, hopes are pinned on earnings delivering,” said Societe Generale macro strategist Kit Juckes.
The dollar index against a basket of six major currencies rose 0.4 percent to 91.093. It had climbed overnight to 91.076, highest since Jan. 12, before a slide in Wall Street stocks tempered investor risk appetite.
Against the yen, the dollar neared a two-month high of 109.20 yen hit in the previous session. It was a notch below that at 109.18 yen, up 0.3 percent on the day.
The greenback had risen without pause through much of the past week as U.S.-China trade conflict fears receded and allowed the market to turn its attention back to dollar-supportive fundamentals, notably the surge by U.S. yields.
The dollar squeeze has been most severe against those currencies heavily backed by speculative investors including the British pound, New Zealand dollar and Mexican peso.
Investors are focused on the euro-dollar exchange rate which has remain stuck in its recent range.
Analysts say the market needs clarity about the speed of the European Central Bank’s monetary tightening cycle before the euro, which rallied at the start of this year before running out of steam in the last two months, breaks higher.
The ECB holds its monetary policy meeting on Thursday.
The euro stormed into 2018 in rally mode as traders bet that synchronized global growth would force the ECB to accelerate monetary policy normalization.
But the ECB’s reluctance so far to signal any shift leaves the “euro’s gains against the dollar vulnerable to setbacks”, said Commerzbank analyst Thu Lan Nguyen in a note.
Nguyen said that the euro-dollar exchange rate continues to be dominated mainly by moves in the US dollar that is now beginning to benefit from higher US interest rates.
This week the gap between U.S. and German 10-year government bond yields has hit its widest in 29 years and the U.S.-Japanese 10-year yield spread reached its broadest in nearly 11 years.
The treasury yield extended its overnight rise and touched the four-year peak of 3.009 percent, reflecting the durability of the U.S. economic expansion. Accelerating inflation and concerns about increasing debt supply have also driven yields higher.
The pound was down 0.2 percent at $1.3947. It plumbed a one-month low of $1.3919 on Tuesday before rebounding 0.3 percent, on news about a possible takeover of British pharmaceutical company Shire Plc by Japanese drugmaker Takeda Pharmaceutical Co.
The Australian dollar shed 0.4 percent to $0.7569 as it dropped into a four-month trough.
The New Zealand dollar extended losses and dipped to $0.7102, its weakest since Jan. 4.
The Canadian dollar performed a little better on headlines citing Canadian Foreign Minister Chrystia Freeland that “good progress” was being made on NAFTA negotiations.