The dollar rose to 3-1/2-month highs against the Swiss franc on climbing U.S. Treasury yields, while investors for the moment brushed aside implications of the Reserve Bank of New Zealand's first market intervention in 22 years.
The New Zealand dollar posted its largest decline in more than a year Monday after the RBNZ sold its own currency, but the impact on carry trades -- risky trades in which investors buy high-yielding currencies like the New Zealand dollar funded by borrowing low-cost currencies such as the yen and Swiss franc -- was limited.
"When this kind of event occurs you might have a correction or profit taking but the overall sentiment is still there.
People still go after yield," said Lanyee Chan, interbank trader with Union Bank of California. "After today's action, the carry trade is still there," Chan said.
The U.S. dollar briefly peaked just above 1.2400 Swiss francs, before settling at 1.2385 francs, up 0.3 percent from late Friday.
The New Zealand dollar fell 1.8 percent to US$0.7500, well off highs of US$0.7640 reached Friday, the strongest level since the currency was floated in 1985.
The U.S. dollar climbed for the fourth consecutive session against the euro , with the benchmark 10-year Treasury note extending its biggest weekly climb in about two years. The euro was 0.1 percent lower at $1.3358.
The RBNZ intervention to curb the New Zealand dollar came four days after the central bank surprised markets by raising its key interest rate to 8 percent, the highest benchmark rate in the industrialized world.
Central bank intervention is one of the biggest risks to carry trades, but the modest impact on the broader market showed the resilience of the seemingly ubiquitous trading strategy.
"After months of warning, the action (by the RBNZ) backs up the central bank's stance," wrote Camilla Sutton, currency strategist with Scotia Capital in Toronto, in a note.
"Fall-on effects on carry have been evident, but remain somewhat muted. We would expect today's news to benefit the Australian dollar/New Zealand dollar cross ... ," she said.
Against the yen, the New Zealand dollar tumbled 1.5 percent to 91.30 yen. However, the dollar was flat against the yen at 121.80 yen.
The spread of the implied benchmark U.S. interest rate in December 2008 over the euro zone equivalent was near its widest in three months, with fixed-income markets reflecting low implied chances that the Federal Reserve would have to loosen monetary policy this year or next.
"We think that as a result of the repricing of the U.S. yield curve here and the capitulation in terms of U.S. growth deceleration ... the dollar deterioration is likely to pause over the very short term," Jack Malvey, chief global fixed income strategist with Lehman Brothers, said at the Reuters Investment Outlook Summit.
"But in a 12- to 18-month period we still envision the dollar to weaken particularly against Asian currencies."
With no major U.S. economic data Monday, dealers kept liquid currencies, other than the New Zealand dollar, in narrow ranges, waiting for the May U.S. retail sales report Wednesday.
Dealers said robust risk appetite, supported by gains in global equity markets, could mean buyers dip their toe back into the New Zealand dollar market later this week, barring any further action from the central bank.
The Australian dollar slipped 0.2 percent versus the U.S. dollar to US$0.8430, but it jumped 1.5 percent against the New Zealand dollar to NZ$1.1238.