The dollar held firm on Thursday after the 10-year US bond yield popped above the psychologically important 3 percent mark and investors looked to US consumer price data later in the day that could show an acceleration in inflation. The dollar index stood little changed against a basket of six major currencies at 93.02 after hitting a 4-1/2-month high of 93.42, extending its gains from its April low to 4.7 percent.
"Rises in US interest rates are pushing the dollar higher," said Ayako Sera, market economist at Sumitomo Mitsui Trust Bank, noting that investor sentiment is stronger now than in February when worries about higher rates hit stock prices. "At the moment, inflation is higher and there's no major risk-off factors, with even the US exit from the Iran nuclear deal having a minor impact. In that kind of environment, interest rate differentials will end up being the main driver for the dollar," she said.
US consumer price data due at 1230 GMT is expected to show that annual core CPI inflation rose to 2.2 percent in April, which would be the highest in more than a year, from 2.1 percent in March. US producer price inflation on Wednesday was slightly weaker than expected, however, this had little impact on market sentiment. The 10-year US bond yield rose above 3 percent on Wednesday, edging near its 2014 peak of 3.041 percent. It last stood at 2.988 percent.
The dollar stood little changed at 109.73 yen, but remained close to its three-month high of 110.05 yen touched on May 2. The euro hit a 4-1/2-month low of $1.1823 on Wednesday, having fallen in six of the last seven sessions. It last traded at $1.1863. The British pound hovered above Monday's four-month low as traders expect the Bank of England to keep rates on hold at its meeting later in the day.
A recent run of weak UK economic data and renewed worries about Brexit have led markets to price out the possibility of a rate hike this month. The pound last stood flat at $1.3561, not far from $1.3485 touched on Monday. The New Zealand dollar shed as much as 1.1 percent to a five-month low of $0.6916 after the Reserve Bank of New Zealand (RBNZ) held interest rates steady and said the next move in rates could just as easily be a cut as a hike.
"The RBNZ surprised markets with a slight dovish shift. It kept the OCR (official cash rate) on hold, as was widely expected, but notably allowed for the OCR to move 'up or down', rather than simply on hold - a slightly dovish development in our view," said Imre Speizer, economist at Westpac in Auckland. The Malaysian ringgit fell 2.4 percent in the non-deliverable forward market, its biggest daily fall in a year and a half, after Malaysia's ruling coalition that has dominated the country for six decades was unexpectedly voted out of power.
An alliance of opposition parties led by former Prime Minister Mahathir Mohamad clinched the simple majority required to rule. Financial markets have so far showed muted response to reports of skirmishes between Israel and Syria, though some market players said they warrant more caution. Israel launched dozens of rockets into Syria early on Thursday, destroying a radar installation and hitting an ammunitions dump, Syrian state media reported while Israel's military said Iranian forces in Syria had shelled one of its outposts in the Israel-occupied Golan Heights.
That took place amid rising expectations of a regional flare-up after US President Donald Trump's announcement on Tuesday that Washington would pull out of a nuclear deal with Iran. "The situation looks quite precarious. I suspect risk assets could come under pressure and so would the dollar," said Akira Takei, fixed income fund manager at Asset Management One.
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