Dollar pulls back as world share markets show signs of stability

By Hideyuki Sano

TOKYO (Reuters) – The dollar slipped back on Tuesday as global equity markets showed some sign of stability after the recent rout, reviving risk appetite and putting the U.S. currency on the defensive on worries about its receding yield advantage.

The dollar’s index against a basket of six major currencies () () stood at 90.142, having fallen 0.26 percent on Monday and edging away from Thursday’s half-month high of 90.569.

The euro () traded at $1.2298, bouncing off last week’s low of $1.2206, though it was still more than two cents below its 3-year high of $1.2538 hit on Jan. 25.

Buying the euro was one of the popular trades earlier this year on the view that the European Central Bank will scale back its stimulus later this year on the back of a strong recovery in the euro zone economy.

The British pound edged up to $1.3846 from Friday’s low of $1.3764. Despite uncertainties around Brexit, the pound has been propped up by rising expectations the Bank of England will raise interest rates to curb inflation.

The revival of risk appetite dented the yen, with the dollar changing hands at 108.70 yen , recovering from Friday’s five-month low of 108.05 yen.

Global stock markets staged a strong rebound since a brutal sell-off that began late January on worries about rising inflationary pressure.

Higher inflation could prompt the Federal Reserve to tighten its policy faster than expected. Alternatively, if the Fed doesn’t act fast enough and falls behind the curve on policy, it could end up pushing up long-term bond yields. In either scenario, traders worry that U.S. growth could be hampered.

There were some indications such fears are beginning to subside, with Wall Street shares rebounding strongly on Monday and MSCI’s all-country world index () of stock performance rising 1.2 percent.

Still, market players are not convinced the worst is over.

The 10-year U.S. bond yield hit a four-year high of 2.902 percent () while the 30-year yield rose to 11-month high of 3.199 percent ().

“Rise in long-term bond yields lifts mortgage lending costs and is likely to cool the economy,” said Minori Uchida, chief FX analyst at the Bank of Tokyo-Mitsubishi UFJ.

Uchida said the dollar is likely to remain under pressure against the yen.

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