Photo illustration of U.S. dollar notes displayed in Johannesburg

Dollar weakens as debt market shakeout persists

By Patrick Graham

LONDON (Reuters) – The euro rose against a broadly weaker dollar in Europe on Tuesday, with gyrations on the bond market undermining the broad story of U.S. currency strength that has dominated the past year on foreign exchange markets.

The latest move in a broad repricing of risk in debt markets, which analysts are still struggling to explain, was a rise in longer-dated U.S. yields overnight.

That should have benefited the dollar, but German Bund yields rose by more and elsewhere there was positive data that helped both sterling and the Australian dollar higher. That all added up to a 0.7 percent fall in the dollar index. The euro rose almost a full percentage point to $1.1252.

“My feeling is this is all broadly a shake out of positioning,” Rabobank strategist Jane Foley said.

“The market had got itself very long dollars, very short euro and very long bonds. There are some major positions being readjusted and it may take some weeks or even months before we get back on track.”

There was little clarity in the euro’s moves after Greece made an early payment to the International Monetary Fund but offered no sign a positive conclusion to its talks with euro zone creditors was nearing.

The single currency fell in early trade in Asia before recovering. More broadly, it has stalled since hitting its highest levels in more than two months last week above $1.13, but remains within a cent of those levels.

The surge for sterling since last week’s polls also continued, driven on by a better than expected set of numbers on industrial and manufacturing output. The pound rose as high as $1.5710 — a 5-month high — before retreating to $1.5678, up 0.6 percent on the day.

“If we can hold above the 200-day moving average at $1.5624 on a daily close then this is a positive development that could signal further upside in the medium term towards 1.60,” said Kathleen Brooks, head of research at retail platform

The Bank of England’s latest inflation report and wage and labor data on Wednesday should provide more impetus.

Against the yen, the dollar dipped less than 0.1 percent to 119.99 yen <JPY=>, well above its overnight low of 119.40 and solidly within its ranges held since mid-March.

Both the Australian and New Zealand dollars have benefited from the bond market moves. The premium offered by two-year Australia debt <AU2YT=RR> over its U.S. counterpart has widened to 152 basis points, from as little as 112 basis points in March, and that of two-year New Zealand debt <NZ2YT=RR> has widened to 251 basis points, from 247 basis points on Monday.

The Aussie rose 1.1 percent to $0.7977. The kiwi gained 0.7 percent to $0.7388.

(Editing by Raissa Kasolowsky)


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