Dollar hits 10-1/2-month high as Treasury yields surge

© Reuters. FILE PHOTO: Euro, Hong Kong dollar, U.S. dollar, Japanese yen, pound and Chinese 100 yuan banknotes are seen in this picture illustration, January 21, 2016. REUTERS/Jason Lee/Illustration

By Gertrude Chavez-Dreyfuss and Elizabeth Howcroft

NEW YORK/LONDON (Reuters) -The U.S. dollar climbed to its highest level in more than 10 months on Tuesday, while other major G10 currencies weakened, as a rise in U.S. Treasury yields made the greenback more attractive to investors.

U.S. Treasury yields have surged since the end of last week, after the Federal Reserve said it will likely begin reducing its monthly bond purchases as soon as November and hinted that interest rate hikes may follow.

On Tuesday, benchmark 10-year Treasury yields hit a three-month peak, and were last up five basis points at 1.5374%.

"Currencies are completely fixated on what's happening in the Treasury market," said Edward Moya, senior market analyst at OANDA in New York.

"Expectations are also pretty high that infrastructure spending is going to get done and we're going to see a lot more Treasury issuance and this is just going to drive up yields and the dollar is going to be supported by it," he added.

In mid-morning trading in New York, the U.S. dollar index hit its highest level since early November and was last up 0.4% at 93.750.

Risk aversion exacerbated the currency market moves, said Neil Jones, head of FX sales at Mizuho, with equity markets down.

The Australian dollar, which is seen as a liquid proxy for risk appetite, was down 0.5% at US$0.7249.

The euro was down 0.2% versus the dollar at $1.1676. Earlier in the session, it hit a six-week low of $1.1672.

"Amidst the many cross-currents in FX markets right now - energy, Evergrande, U.S. debt ceiling, Delta - one theme that seems to be gaining traction is that the market lies on the cusp of re-assessing 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 re-assess 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 0.5% at 111.60 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 1.2% at $1.3535. 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.

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Currency bid prices at 9:51AM (1351 GMT)

Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Dollar index 93.7890 93.4110 +0.42% 4.232% +93.8050 +93.3600

Euro/Dollar $1.1672 $1.1695 -0.20% -4.47% +$1.1704 +$1.1672

Dollar/Yen 111.6150 111.0100 +0.55% +8.03% +111.6350 +110.9350

Euro/Yen 130.26 129.79 +0.36% +2.63% +130.3600 +129.6800

Dollar/Swiss 0.9301 0.9257 +0.48% +5.13% +0.9301 +0.9259

Sterling/Dollar $1.3530 $1.3706 -1.28% -0.96% +$1.3717 +$1.3531

Dollar/Canadian 1.2689 1.2629 +0.48% -0.35% +1.2689 +1.2594

Aussie/Dollar $0.7233 $0.7287 -0.73% -5.97% +$0.7311 +$0.7231

Euro/Swiss 1.0854 1.0824 +0.28% +0.43% +1.0857 +1.0826

Euro/Sterling 0.8624 0.8538 +1.01% -3.50% +0.8628 +0.8526

NZ $0.6952 $0.7014 -0.83% -3.15% +$0.7026 +$0.6950

Dollar/Dollar

Dollar/Norway 8.6495 8.6010 +0.58% +0.75% +8.6615 +8.5990

Euro/Norway 10.0959 10.0530 +0.43% -3.55% +10.1137 +10.0475

Dollar/Sweden 8.7384 8.7079 +0.21% +6.62% +8.7397 +8.6971

Euro/Sweden 10.2006 10.1792 +0.21% +1.23% +10.2055 +10.1750