Dollar firm as rate advantages come under spotlight

The dollar held firm on Thursday after the 10-year US bond yield rose back to the psychologically important 3 per cent mark and investors looked to US consumer price data due later to show a acceleration in inflation. The dollar index against a basket of six major currencies stood at 93.11 after hitting a 4 1/2-month high of 93.42, extending its gains from its April low to 4.7 per cent.

“Rises in the US interest rates are pushing the dollar higher,” said Ayako Sera, market economist at Sumitomo Mitsui Trust Bank, noting that investor sentiment is stronger now than in February when worries about higher interest rates hit stock prices. “At the moment, inflation is higher and there's no major risk-off factors, with even the US exit from the Iran nuclear deal having a minor impact. In that kind of environment, interest rates differentials will end up being the main driver for the dollar,” she said.

US consumer price data due at 1230 GMT is expected to show the annual core CPI inflation to have risen to 2.2 per cent in April, which would be highest in more than a year, from 2.1 per cent in March. US producer price inflation on Wednesday was slightly weaker than expected, however, this had little impact on market sentiment.

The 10-year US bond yield rose above 3 per cent on Wednesday, edging near its 2014 peak of 3.041 per cent. It last stood at 2.990 per cent.

The dollar stood little changed at 109.85 yen, but remained close to its three-month high of 110.05 yen touched on May 2. The euro hit a 4-1/2 month low of $1.1823 on Wednesday, having fallen in six of the last seven sessions. It last traded at $1.1851. The British pound hovered above Monday's four-month low as traders expect the Bank of England to keep rates on hold at its meeting later in the day.

A recent run of weak UK economic data and renewed worries about Brexit have led markets to price out the possibility of a rate hike this month. The pound last stood flat at $1.3548, not far from $1.3485 touched on Monday.

The New Zealand dollar shed as much as 0.9 per cent to a five-month low of $0.6929 after the Reserve Bank of New Zealand (RBNZ) held interest rates steady and said the next move in rates could just as easily be a cut as a hike. “The RBNZ surprised markets with a slight dovish shift. It kept the OCR (official cash rate) on hold, as was widely expected, but notably allowed for the OCR to move 'up or down', rather than simply on hold a slightly dovish development in our view,” said Imre Speizer, economist at Westpac in Auckland.

The Malaysian ringgit fell 2.4 per cent in the non-deliverable forward market, its biggest daily fall in a year and a half, after Malaysia's ruling coalition that has dominated the country for six decades was unexpectedly voted out of power. An alliance of opposition parties led by former Prime Minister Mahathir Mohamad clinched the simple majority required to rule.

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