NEW YORK (Reuters) - The U.S. dollar edged lower against a basket of currencies on Monday as U.S. Treasuries erased earlier losses, with 10-year U.S. Treasury yields retreating after briefly breaching the 5% level.
Moves in the foreign exchange market were largely muted on Monday as traders awaited several events this week, including a European Central Bank meeting, and the release of U.S. GDP data and the Federal Reserve's preferred inflation gauge.
Advertisement · Scroll to continue "A big week of data with eyes on U.S. GDP on Thursday, plus BoC (Bank of Canada) and ECB (European Central Bank) in the mix, and of course geopolitical risk remaining incredibly elevated is really denting traders' desire to do much as the week gets underway," said Michael Brown, market analyst at Trader X, in London.
But the main news on Monday was the yield on 10-year U.S. Treasuries reaching as high as 5.021%, the latest stage of a relentless sell-off in government bond markets, driven by investors accepting central banks will keep rates persistently high, particularly in the United States, an increase in supply of bonds and widening term premia.
The 10-year yield was last at 4.905%.
Besides that, the risk of Israel's war on the Islamist group Hamas becoming a wider regional conflict is keeping markets on edge, as Israeli air strikes battered Gaza early on Monday, and the United States dispatched more military assets to the region.
The dollar index , which measures the currency's strength against a basket of six rivals, was 0.2% lower at 105.97. The index had risen as high as 106.33 earlier in the session.
The surge in U.S. Treasury yields since mid-July has boosted the U.S. dollar's appeal relative to other currencies and helped lift the U.S. dollar index more than 6%.
"On paper, it should be a good week for the dollar. US GDP should come in at over 4% and the Fed's preferred measure of inflation should still be running hot," said Chris Turner, ING's global head of markets.
"In Europe, PMIs and the ECB bank lending survey should show an economy mired in stagnation, if not recession."
Barclays analysts were less sure the dollar had much further to go, however, pointing to stretched long dollar positioning and a smaller likelihood of further rises in long-dated yields without a reassessment of the Fed's rate outlook.
The Japanese yen last traded at 149.88 per dollar, after slipping as low as 150.14, a level last seen on Oct. 3 when traders suspected the Bank of Japan (BOJ) intervened to nudge it back to the stronger side of 150.
The BOJ's money market data later suggested that the yen's sudden strengthening was most likely not the product of official Japanese intervention.
Masafumi Yamamoto, chief currency strategist at Mizuho Securities in Tokyo, said it seemed like a set of investors were betting the BOJ would defend the 150 level, even as others saw rising U.S. yields as a reason to keep pushing the dollar up.
While there was some speculation the BOJ might once again tweak its yield-curve policy band at a scheduled policy review next week, the BOJ had also shown it would not let domestic yields rise sharply, he said.
The European Central Bank meets on Thursday, and a poll by Reuters shows while it is done raising rates it won't begin easing until at least July 2024. It raised its key interest rates by 25 basis points in September.
The euro was up 0.24% on the day.
The Canadian dollar edged higher against the greenback on Monday, ahead of Wednesday's Bank of Canada interest rate announcement.
The central bank is probably done raising interest rates and will hold them at 5.00% for at least six months, according to a Reuters poll of economists that found a majority expecting a reduction in the second quarter of 2024 as the economy slows.
In cryptocurrencies, bitcoin was up 2.4 % on the day at $ 30,717 , a fresh 3-month high, as traders awaited regulatory approval of a bitcoin ETF.