NEW YORK :The U.S. dollar surged to its highest in more than 10 months on Tuesday, tracking the rise in Treasury yields, as investors looked ahead to the Federal Reserve possibly reducing asset purchases in November and an interest rate hike likely to follow.
On Tuesday, benchmark 10-year Treasury yields hit a three-month peak, and were last up four basis points at 1.5253per cent.
The rise in yields accelerated after the U.S. central bank turned hawkish at last week's monetary policy meeting, reinforcing the market view for a sooner-than-expected Fed taper.
"Yields are generally moving higher as rising inflation expectations weigh on the relative attractiveness of government bonds, but are climbing even faster in the United States as traders bet the Federal Reserve will move more quickly than its global counterparts," said Karl Schamotta, chief market strategist at Cambridge Global Payments in Toronto.
"Rate differentials are tilting toward the dollar, weakening low-yielders and putting pressure on economies with significant borrowing needs."
In afternoon trading in New York, the U.S. dollar index reached its highest level since early November and was last up 0.3per cent at 93.719.
Risk aversion exacerbated the currency market moves, said Neil Jones, head of FX sales at Mizuho, with Wall Street shares down.
The Australian dollar, which is seen as a liquid proxy for risk appetite, dropped 0.6per cent at USUS$0.7240.
The euro was down 0.1per cent versus the dollar at US$1.1681 . Earlier in the session, it hit a six-week low of US$1.1668, after comments from U.S. Treasury Secretary Janet Yellen, saying that U.S. inflation at the end of the year would be closer to 4per cent, double the Fed target.
"One theme that seems to be gaining traction is that the market lies on the cusp of reassessing the path for the Fed tightening cycle," ING strategists wrote in a note to clients.
"A big move higher in the short-end is the key reason why we are bullish on the dollar, particularly from 2Q next year, but we will closely monitor and reassess whether that move needs to come earlier - largely a function of timing the take-off in short-end rates."
The Japanese yen weakened to its lowest level in nearly three months against the dollar. The greenback was last up 0.5per cent at 111.57 yen..
The yen is the G10 currency most correlated with U.S. two-year and 10-year Treasury yields, MUFG currency analyst Lee Hardman said in a note to clients.
Minutes from the Bank of Japan's July meeting showed that some central bank policymakers warned of the risk of a delay in the country's economic recovery.
The British pound, meanwhile, was down 1.2per cent at US$1.3532. The currency jumped last week after a hawkish tone by the Bank of England, but analysts struck a cautious note on the currency as Britain struggled with supply chain chaos due to a shortage of truck drivers.
Currency bid prices at 3:02 PM (1902 GMT)
Description RIC Last U.S. Pct Change YTD Pct High Bid Low Bid
Dollar index 93.7590 93.4110 +0.39per cent 4.199per cent +93.8050 +93.3600
Euro/Dollar US$1.1676 US$1.1695 -0.15per cent -4.43per cent +US$1.1704 +US$1.1668
Dollar/Yen 111.5950 111.0100 +0.53per cent +8.00per cent +111.635 +110.935
Euro/Yen 130.28 129.79 +0.38per cent +2.65per cent +130.360 +129.680
Dollar/Swiss 0.9299 0.9257 +0.45per cent +5.11per cent +0.9302 +0.9259
Sterling/Dol US$1.3531 US$1.3706 -1.25per cent -0.94per cent +US$1.3717 +US$1.3522
Dollar/Canad 1.2676 1.2629 +0.36per cent -0.47per cent +1.2707 +1.2594
Aussie/Dolla US$0.7238 US$0.7287 -0.66per cent -5.90per cent +US$0.7311 +US$0.7226
Euro/Swiss 1.0857 1.0824 +0.30per cent +0.46per cent +1.0859 +1.0826
Euro/Sterlin 0.8626 0.8538 +1.03per cent -3.48per cent +0.8640 +0.8526
NZ US$0.6954 US$0.7014 -0.86per cent -3.17per cent +US$0.7026 +US$0.6943
Dollar/Norwa 8.6650 8.6010 +0.80per cent +0.97per cent +8.6815 +8.5990
Euro/Norway 10.1163 10.0530 +0.63per cent -3.35per cent +10.1426 +10.0475
Dollar/Swede 8.7361 8.7079 +0.21per cent +6.58per cent +8.7499 +8.6971
Euro/Sweden 10.2003 10.1792 +0.21per cent +1.23per cent +10.2166 +10.1750
(Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Elizabeth Howcroft in London; Editing by Bernadette Baum, Susan Fenton and Mark Heinrich)