Dollar slides as lower U.S. yields give markets a breather

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TOKYO/LONDON — The dollar slipped on Tuesday as US Treasury yields paused in an inexorable climb, giving stock markets brief relief and helping the euro and sterling stray further from multi-year lows.

The Australian dollar was also in focus, falling around 1% after the country’s central bank surprised markets with a lower-than-expected interest rate hike before recovering, reflecting the broader recovery in risk sentiment.

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The euro was last up 0.5% to $0.9876, a modest rebound from its 20-year low of $0.9528 on September 26, while sterling was up 0.6% to $1.1390 , from a record low of $1.0327 on the same day.

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A calmer UK government bond market was also a relief for the pound following the recent government-related turmoil.

In a statement on Monday, the Bank of England reiterated its readiness to buy long-dated gilts, and the head of Britain’s debt management office, which oversees the bond market, told Reuters in an interview the market was resilient.

“The pullback in the US dollar coincided with a sharp correction in US yields,” MUFG analysts said in a note to clients, adding that the two moves “provide much-needed relief for risky assets and currencies would have brought high beta. ”

MUFG named the New Zealand dollar, up 2.6% since the week started, and the Norwegian krone, up 3%, as notable beneficiaries.

The moves in the dollar and in yields appear to reflect in part market participants’ greater confidence that the Fed is nearing the end of its rate-hiking cycle, they said.

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“Market expectations for the final Fed interest rate next year have fallen to 4.39% from around 4.75%,” they added.

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The benchmark 10-year Treasury yield was 3.5677%, a sharp drop from last week when it briefly rose above 4%.

The relentless rise in US yields, while the Federal Reserve is aggressively raising interest rates, has been a factor in the dollar’s recent gains.

Stocks in Asia and Europe also rose on Tuesday, in line with improved sentiment, after overnight gains in the United States

Elsewhere, the dollar was little changed at 144.7 against the yen, remaining below 145 after briefly falling above that level on Monday for the first time since Japanese authorities intervened to shore up their currency on Sept. 22.

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Japanese Finance Minister Shunichi Suzuki reiterated Monday that the authorities stand ready to take “decisive” action in the foreign exchange market if the yen’s “sharp and one-sided” moves continue.

The Australian dollar, which normally rises when investors trust riskier assets, rose 0.15% to $0.6525.

That marked a rebound from a roughly 1% decline in trade earlier in the day after the Reserve Bank of Australia hiked rates by less than an expected 25 basis points and said rates had risen significantly in a short period of time.

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“Obviously the RBA wasn’t convinced by what other central banks are doing saying they don’t have exchange rate concerns down here,” said Ray Attrill, head of FX strategy at National Australia Bank in Sydney.

“There’s no evidence yet that other central banks are about to reverse the aggression they’re tightening policy with, (so) I think it makes sense that Aussie is below 65 for now.”

(Reporting by Kevin Buckland; Editing by Lincoln Feast and Clarence Fernandez)

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