Dollar at three-and-a-half month high on elevated yields, euro soft after ECB

On Friday, the dollar held near a 3-1/2-month high against a basket of currencies as higher U.S. yields have prompted unwinding of big short positions in the currency while the euro was hampered by a dovish tone from the European Central Bank.

The measure of the greenback strength against a basket of six major currencies (DXY), which is dollar index, hit a high of 91.639, its strongest level since mid-January as investors have warmed to the greenback thanks to attractive Treasury yields.

As a result of President Donald Trump‘s tax cuts and spending plans, the benchmark 10-year U.S. Treasuries (US10YT=RR) had hit the psychologically important three percent mark on combination of worries about inflation and increased debt supplies.

The correlation between U.S. yields and the dollar broken down, earlier this year, as investors focused more on trade frictions and geopolitical issues, with currencies largely driven by Trump’s tweets than by economic data and yields.

But so far this week, the markets have turned their attention to interest rate plays, as concerns over U.S.-China trade tensions have ebbed somewhat.

In addition, speculators’ net dollar short position in currency futures in Chicago, a closely-watched indicator on market positioning, had hit a 6-1/2-year high, suggesting some short-covering will be due.

Analysts at ANZ wrote that there is an element of positioning unwind underpinning the recent dollar strength. The currencies that had the largest net long positions against the dollar are the ones that have declined the most.

The euro, in which speculators had a record long position, fell to $1.20965 (EUR=) in the previous session, its lowest level since Jan. 12. It last stood at $1.21805, and is down 1.5 percent on the week.

On Thursday, the common currency slid after ECB chief Mario Draghi acknowledged evidence of a “pull-back” from exceptional growth readings seen around the turn of the year, although the central bank sought to bolster expectations for a gradual withdrawal of its monetary stimulus.

The dollar changed hands at 109.33 yen, having risen to a 2-1/2-month high of 109.49 yen earlier in the week. So far this week, it has gained 1.5 percent.

As drugmaker Takeda Pharmaceutical (T:4502) is pushing to buy London-listed Shire (L:SHP) in a $64 billion deal, which would be the biggest Japanese acquisition of a foreign company, the yen’s weakness is likely to reflect expectations of yen-selling .

Yukio Ishizuki, senior strategist at Daiwa Securities said that given the May 8 deadline of the deal, you would need to be really courageous to go long on the yen until then.

While in contrast, the pound has been relatively well-supported. It last stood at $1.3915 , down 0.6 percent so far this week.

Against the yen, it was fetching 152.14 yen (GBPJPY=), up 0.9 percent this week.

Elsewhere, the Australian dollar hit a 4-1/2-month low of $0.75465.

After the Swedish central bank Riksbank pushed back its rate hike plan due to worries about sluggish inflation, the Swedish crown weakened, hitting its lowest level since November 2009 against the euro (EURSEK=)./Reuters.com

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