The dollar climbed against the euro Tuesday to two-month highs as rising U.S. Treasury yields lured investors.
With few major U.S. economic indicators on Tuesday, dealers stuck to buying dollars based on the recent advantage of U.S. government bond yields over other government debt, a trade some analysts said could be close to running its course.
"The dollar's getting support from Treasury yields," said Ron Simpson, director of currency research at Action Economics in Tampa, Florida. "But we're waiting for U.S. retail sales, CPI and PPI later in the week which may determine the dollar's direction."
Mid afternoon in New York, the euro was down 0.3 percent from late Monday, after touching a two-month low of $1.3311. The dollar was little changed at 121.74 yen , still near a 4-1/2-year high around 122.20 yen hit in January.
Expectations of a near-term cut in U.S. interest rates have faded, sending bond yields higher. This, coupled with continued concerns about inflationary pressures voiced by Federal Reserve policy-makers, has supported the dollar.
Some analysts cautioned that views on the dollar could change, depending on what information is gleaned on Wednesday from the U.S. retail sales report for May. The U.S. producer price index for May will be released on Thursday, with the U.S. consumer price index for May released on Friday.
Eye on China
Investors will also be watching the U.S. Treasury's semiannual Report on International Economic and Exchange Rate Policies Wednesday, for any comments on China's yuan.
The yuan on Tuesday posted its largest gain against the dollar since its July 2005 revaluation, rebounding from a three-day slide after the central bank set a much higher reference rate for the Chinese currency.
American policy-makers have argued that China's managed currency policy artificially weakens the yuan, favors Chinese exports and widens the U.S. trade gap. While the Treasury report is not expected to label China a currency manipulator, investors may remain cautious ahead of the report.
Investors will also closely monitor the unveiling of a bill in the Senate Wednesday that would allow the U.S. to impose penalties on countries setting their currencies artificially low.
New Zealand Dollar Up
The New Zealand dollar was up 0.1 percent though dealers took few big bets after the Reserve Bank of New Zealand intervened in the market and weakened its currency for the first times since the kiwi was floated in 1985.
The RBNZ's intervention has not dented investor focus on reaching for higher yields and rewarding currencies where interest rates are likely headed higher.
Monday's RBNZ selling helped to drive the New Zealand dollar down as much as 2 percent. On Tuesday the New Zealand dollar was still up 6.8 percent this year to date.