Dollar on back foot as US yields drop despite strengthening US recovery

TOKYO: The dollar stabilised near an almost two-week low versus a basket of its peers on Tuesday, moving in tandem with a retreat in Treasury yields from recent peaks despite signs of a robust US economic recovery.

The dollar index sank as low as 92.527 in the Asian session, its weakest since March 25. The softer turn comes less than a week after hitting an almost five-month top at 93.439.

The yen continued to recover from a more than one-year low near 111 per dollar, briefly strengthening back below 110 on Tuesday. The euro extended its rise from a nearly five-month trough close to $1.17 to trade as high as $1.1821.

The greenback has risen strongly this year, along with Treasury yields, as investors bet on a faster US pandemic rebound than other developed nations amid massive stimulus and aggressive vaccinations.

But the dollar's drop this week even after Friday's much-stronger-than-expected monthly payrolls data was followed on Monday by the highest reading for services industry activity on record may indicate that much of the bullish outlook is priced in for now.

"While the US does look exceptional, COVID normalization over time means the rest of the world will converge," Mark McCormick, the global head of foreign-exchange strategy at TD Securities, wrote in a client note.

"The USD level has now outstripped the pickup in non-US growth expectations," meaning "there's room for a USD pause" in its recent uptrend, he wrote.

Benchmark 10-year Treasury yields continued their retreat Tuesday, dipping below 1.7% early in the Asian session, from a peak of 1.776% last week - a level not seen since January of last year.

That's even as the robust economic outlook boosted US stocks to record highs.

However, Westpac strategists see room for further dollar gains, saying the run of strong data "cement the USD's unbeatable growth rebound credentials."

"DXY has not capitalised on the strong macro tailwinds," they wrote, referring to the dollar index.

"Pullbacks into 92 should be bought for a run to the 2020 Q3 highs around 94.50."

Elsewhere, the Australian dollar, considered a proxy for risk appetite, slipped slightly to $0.76415 on Tuesday, after rallying 0.8% to start the week. The Reserve Bank of Australia left policy unchanged on Tuesday, as expected.

The British pound rose to a 2-1/2-week high of $1.3915 in Asia, building on the previous session's 0.6% advance.

In cryptocurrencies, bitcoin traded around $58,882 on Tuesday, easing back a little after a two-day gain. It reached a record high at $61,781.83 in the middle of last month.

The cryptocurrency market capitalization hit an all-time peak of $2 trillion on Monday, according to data and market trackers CoinGecko and Blockfolio, as gains over the last several months attracted demand from both institutional and retail investors.