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The dollar stood tall on Tuesday as a rout in global equities prompted anxious investors to seek shelter in the relative safety of the greenback, with peers like the euro on the defensive.
The euro was steady at $1.2371 after shedding 0.7 per cent overnight to pull further away from a three-year high of $1.2538 set late in January. The dollar index against a basket of six major currencies stood at 89.628. It rose to an 11-day high of 89.699 the previous session, when it advanced 0.5 per cent.
The greenback was firmly on the back foot as recently as late January, when the dollar index fell to a three-year trough of 88.438, hurt by a range of factors including concerns about US trade protectionism and perceptions of narrowing yield advantage. It caught a break, however, lifted by Friday's robust US employment report and the punishing sell-off in the recently bullish global equity markets.
“We are seeing a big rewinding of positions that had been built up since the start of the year, such as euro longs,” said Masafumi Yamamoto, chief forex strategist at Mizuho Securities in Tokyo. “The stock market plunge caused by the jump in yields has been the trigger. Investors hurting from the drop in equities are seen trying to limit their losses by selling recently bullish currencies like the euro, which in turn supports the dollar.”
The dollar also tends to benefit from its perceived safe-haven status at times of market ructions. The Dow, which rose to a record high late in January, fell 2.5 per cent on Friday and plunged 4.6 per cent on Monday. The sharp pullback comes amid concerns about higher inflation, sending US bond yields surging to a four-year top on Monday.
Friday's US jobs report was the latest jolt to financial markets, as strong wages growth reinforced the inflation and monetary tightening speculation, with traders betting the Federal Reserve might raise rates at a faster pace than expected this year.
The pound touched a two-week low of $1.3937 after dropping more than 1 per cent overnight. Sterling hit a one and a half year high of $1.4346 late last month. The Australian dollar was little changed at $0.7880 following a loss of 0.5 per cent on Tuesday. The Aussie had advanced to over a two and a half year top at $0.8136 on January 26.
The dollar advanced against most of its counterparts with the exception of the yen, which is the perennial safe-haven bet during times of risk aversion. The greenback was steady at 109.130 yen after dropping 1 per cent overnight, dragged lower as US Treasury yields fell from four-year highs on Monday after the rapid sell-off in equity markets sparked demand for the low risk debt.