By Elizabeth Howcroft
LONDON (Reuters) -The dollar rose and the euro fell on Tuesday, as markets focused on divergent reactions to the recent rise in government bond yields, while the New Zealand dollar dropped to a three-month low on new measures to cool the housing market.
There was a cautious tone in global markets, with equities in the red, after a weak Asian session led by declines in Chinese markets.
The United States, the European Union, Britain and Canada sanctioned Chinese officials on Monday over human rights abuses in Xinjiang. Beijing hit back with punitive measures against European lawmakers, diplomats, institutes and families.
Also contributing to market caution was a third wave of the COVID-19 pandemic in Europe. Germany is extending its lockdown and urging citizens to stay at home for five days over the Easter holidays, Chancellor Angela Merkel said.
“The common currency looks set to remain quite vulnerable on the back of virus-related developments,” ING strategists said in a note to clients.
The European Central Bank’s chief economist, Philip Lane, said that the central bank would do its part to keep government bond yields ultra-low.
The dollar index was up 0.3% at 92.111 at 1152 GMT. Euro-dollar was down 0.4% at $1.1882.
The dollar index has gained around 2.4% so far in 2021, as speedy rollouts of COVID-19 vaccines in the United States and the Biden Administration’s $1.9 trillion stimulus are seen lifting growth, driving up bond yields and drawing investors.
Investors perceive the ECB as more concerned about the rise in yields, and therefore less likely to tighten monetary policy, than the U.S. Federal Reserve, and that this is fuelling dollar gains, said Ulrich Leuchtmann, head of FX and commodity research at Commerzbank.
“Market participants, not for 2021, not for the best part of 2022, but somewhere in the foreseeable future expect the Fed to normalise monetary policy, and this is certainly something which keeps U.S. dollar strong and keeps euro-dollar safely below $1.20,” Leuchtmann said.
Market participants will be listening to Congressional testimony by U.S. Federal Reserve Chair Jerome Powell and Treasury Secretary Janet Yellen later in the day for any hints about their tolerance for rising yields, which could determine the future direction for the dollar.
“Every time Powell shows up in public, there’s certainly a risk that he might change his mind and be more outspoken about the risk of rising yields, and this would then immediately end the dollar’s strength that we are seeing at the moment,” Leuchtmann said.
The level of demand at a two-year Treasury auction later in the session will also be closely watched.
Elsewhere, the New Zealand dollar fell overnight and extended its losses as European markets opened, dropping to a three-month low against the U.S. dollar.
At 1203 GMT, it was down 1.7% on the day at 0.70385.
The drop was triggered by the New Zealand government’s introducing measures to curb speculation on its red-hot housing market, where house prices have risen 23% in 12 months. The kiwi fell as the reforms lessened expectations for policy tightening.
“The government measures will help to take pressure off the RBNZ (Reserve Bank of New Zealand) to address risks to financial stability from the housing market, and thereby delay the need to hike rates in response,” MUFG currency analyst Lee Hardman wrote in a note to clients.
The Australian dollar – considered a liquid proxy for risk – also took a hit and was down 1% at 0.7671 versus the U.S. dollar.
Turkey’s lira stabilised somewhat, having plunged 7.5% on Monday after President Tayyip Erdogan sacked the hawkish central bank chief. It was down around 1.4% against the U.S. dollar, with the pair changing hands at 7.9115, compared with Monday’s low of 8.485.
(Reporting by Elizabeth Howcroft, editing by Larry King)
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