The dollar rose broadly to a two-month high on Friday as surging U.S. Treasury yields widened their advantage over other major government bonds and amid sharply reduced expectations for interest rate cuts by the Federal Reserve.
A sell-off in global stocks and bonds helped push the greenback higher as U.S.-based investors repatriated funds, analysts said.
The sharp rise in Treasury yields -- Thursday's move was the biggest one-day jump in 10-year yields in more than three years -- marked the first time since July that the entire yield curve was above 5%.
Government bond yields have been climbing on the view that the global economy remains healthy and central banks will have to keep raising interest rates to control inflation.
U.S. interest rate futures now imply no cuts in benchmark borrowing costs this year and for most of 2008. Furthermore, the spread of the implied benchmark U.S. interest rate in December 2008 over the euro zone's widened to more than 70 basis points -- the highest since mid-March.
"Investors who had aggressively bet on Fed rate cuts are abandoning the ship and now we are in a situation where people are beginning to talk about possible rate hikes," said David Watt, a foreign exchange strategist at RBC Capital in Toronto.
"That, combined with a couple of economic reports and some repatriation of funds, is really giving the dollar a boost."
The euro was lower against the dollar, after earlier dropping to $1.3321, its lowest since April 4. Against a basket of major currencies, the dollar hit a two-month high of 82.919 in its biggest one-day rise this year.
The dollar gained against the yen, as did the euro .
U.S. Trade Balance Report
A report showing a narrower-than-expected trade gap of $58.50 billion in April boosted U.S. growth expectations for the second quarter and also supported the dollar, analysts said.
"The better-than-expected trade balance will lend further support for the dollar today and add to the selloff in the Treasury market," said Charmaine Buskas, currency analyst at Moody's Economy.com in West Chester, Pennsylvania.
In contrast, sentiment on the euro was further depressed by data showing the biggest monthly fall in German industrial output in nearly seven years, suggesting that the euro zone's biggest economy could be starting to slow down.
Thursday's huge sell-off in Treasuries grabbed the headlines. Bill Gross, long-time bond bull and chief investment officer of PIMCO, the world's biggest bond fund, said on Thursday he was now a "bear market manager."
The spread of benchmark 10-year U.S. Treasury yields over euro zone debt with the same maturity at one point on Friday was the widest since late March. And the spread against 10-year Japanese government debt reached its widest in almost 11 months.
A surprise rate rise from the Reserve Bank of New Zealand this week, together with the European Central Bank's rate increase and the recent near-universal reversal of investors' U.S. rate cut expectations, have sent global bond yields soaring.
This has benefited the dollar as U.S. yields and rate expectations have shifted the most dramatically.
"What you're seeing in the rates market is the pricing in of much more symmetrical risk on the U.S. economic outlook," said Daniel Katzive, a currency strategist at UBS AG, in Stamford, Connecticut. "I think we could go a little bit further (higher in the dollar)."