The U.S. dollar edged lower against a basket of currencies on Tuesday, as its recent rally, driven by a spike in U.S. Treasury yields, appeared to run out of steam.
The dollar had hit a more than 2-1/2-year low in January after sliding for months as the U.S. Federal Reserves' interest rate cuts and strong investor demand for riskier assets has sapped demand for the safe-haven U.S. currency.
Expectations for a wave of spending under an incoming Joe Biden administration have pushed Treasury yields higher, with the 10-year yield reaching a 10-month high on Tuesday.
The dollar index, which measures the greenback against a basket of currencies, was 0.11% lower at 90.38. The index, which fell as low as 89.206 last week, has climbed 1.5% since then.
New lockdown measures across Europe to fight a second COVID-19 wave are feeding worries of a "double-dip recession," in the region, said Minh Trang, senior FX trader at Silicon Valley Bank.
That, combined with the rise in U.S. yields, has helped boost the dollar in recent days, Trang said.
The support from rising yields has so far trumped worries that the extra spending in the United States could trigger a faster rise in inflation. But many analysts expect the dollar to resume its decline as stimulus spending and vaccine rollouts brighten the global economic outlook.
Most emerging market currencies rose on Tuesday, including the offshore yuan, Mexican peso and South African rand.
With risk sentiment improving, riskier developed market currencies such as the Australian and New Zealand dollars also made modest gains against the dollar. .
Sterling rose against the euro and the dollar on Tuesday as comments from the Bank of England's governor on the viability of negative interest rates dampened some expectations for subzero rates in Britain.
Bitcoin was down about 5% at $33,866, a day after it fell 7% in a highly volatile session. The cryptocurrency's rally has faltered since it soared to a record high of $42,000 on Jan. 8, and it was on pace for it fourth straight session of losses.