Dollar index steady, supported by higher US yields

Key Points
  • U.S. 2-year yield climbs to highest level since Sept 2008
  • Euro stalls as traders worry about euro zone growth
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The dollar was little changed against a basket of currencies on Thursday as higher U.S. bond yields and expectations of more rate increases from the Federal Reserve offset worries about a trade war and a ballooning U.S. budget deficit.

Recent economic data suggested business activities overseas may have peaked. This has reduced the appeal of the euro, and other currencies which have strengthened against the dollar since 2017 based on the view economies outside the United States had been faring better until recent weeks.

"It's a dull day altogether," said Minh Trang, senior foreign exchange trader at Silicon Valley Bank in Santa Clara, California. "We are seeing rangebound trading with most currencies against dollar."

An index that tracks the greenback versus the euro, yen, sterling and three other currencies was up 0.31 percent, at 89.90.

The dollar index has moved in a narrow 0.6 percentage point range since last Friday.

The euro was last down 0.23 percent, at $1.2344, while the dollar was 0.14 percent higher at 107.38 yen.

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The U.S. economy, while not firing on all cylinders, has remained on a steady growth path which has assured the Federal Reserve to stick with its current pace of rate increases. This has propelled the two-year Treasury yield to 2.436 percent, its highest level since September 2008. Its yield gap over two-year German Bunds has reached its widest level in over three decades. The hefty 3 percentage point yield premium has supported some overseas demand for the dollar, analysts said.

On the other hand, the dollar faces headwinds from the uncertainty stemming from U.S. President Donald Trump's trade and economic policies, as well as political events in the Middle East and elsewhere.

"There is a little bit of fatigue with the trade war issue and the global economic cycle is losing momentum, especially in the euro zone whereas the U.S. is holding up," said Christin Tuxen, an FX strategist at Danske Bank in Copenhagen.

Investors are growing nervous that the euro zone economy's rebound is nearing the top and the European Central Bank may move more slowly to tighten monetary policy. Tuxen remains bullish on the euro, seeing the single currency rise towards $1.30 in 12 months but said in the short-term the euro could fall as the ECB, which meets next week, takes more time in raising rates.