The dollar rose against most major currencies on Thursday as expectations for solid global economic growth pushed US government debt yields above 5 percent, providing a big potential draw for foreign investors.
The third straight day of swooning global share prices also provided a boost to the dollar, analysts said, as US-based investors liquidated some foreign equity holdings. The jump in Treasury yields marked the first time since July 2006 that the entire yield curve was at or above 5 percent.
The spread of the benchmark 10-year Treasury yield over euro zone paper with the same maturity was the widest it has been in about two months, tilting more in the dollar's favour.
Global bond yields have been climbing on the view that the global economy remains healthy and central banks will keep lifting interest rates to ward off inflation. Earlier on Thursday, the Reserve Bank of New Zealand unexpectedly hiked rates to 8 percent. On Wednesday, the European Central Bank lifted rates to 4 percent.
Investors in interest rate futures, meanwhile, have nearly priced out any chance of lower US interest rates this year. "Higher bond yields are quashing expectations of a Fed rate cut, and that's helped the dollar, as has the strong US economic data we've seen. It has market sentiment coalescing around the idea that the worst of the US slowdown is over," said Boris Schlossberg, senior strategist at DailyFX.com.
By early afternoon, the euro was trading at $1.3428, 0.6 percent below its level late on Wednesday, while the dollar was up 0.7 percent at 1.2255 Swiss francs. The dollar index, which measures the greenback against a basket of major currencies, climbed nearly half a percent, its biggest daily gain since mid-May.
The greenback surrendered earlier gains against the yen and last traded at 121.02, unchanged from Wednesday, while the euro was down 0.5 percent against the Japanese currency at 162.67 yen, off a lifetime high of 164.61 hit this week. Some traders said stock losses were prompting investors to trim risk exposure by buying back the yen they had used to finance purchases of higher-yield, higher-risk assets.
That is what happened in late February, when a sharp slide in the Shanghai bourse rattled global stock markets and lifted the Japanese currency.
On Thursday, the VIX index, which measures stock market volatility and is often called Wall Street's fear gauge, rose to its highest level in nearly three months, while US stock indexes were all down more than 1 percent in afternoon trade.
"People are a little nervous right now, and the Dow's slide isn't helping," said one US trader. But David Powell, currency strategist at IDEAglobal in New York, noted that implied yen volatility remains low and global interest rates high, providing a still-solid backdrop for yen-funded carry trades.
"It's a stretch to say we're near an unwind, as I think some players learned their lesson in February when the equities decline translated into a better buying opportunity," he said.
High-yielders continued to advance, with the Australian dollar hitting a fresh 18-year high against its US counterpart and the New Zealand dollar touching $0.7574, its highest level since being floated in 1985, after the central bank hiked rates.
Sterling fell 0.08 percent to $1.9768 after the Bank of England left interest rates on hold at their six-year high of 5.5 percent, though futures markets are pricing in further rate hikes later this year.