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The dollar struck a one-and-a-half-month high on Tuesday as Treasury yields rose after a strong reading for US manufacturing activity hardened expectations for US interest rates to rise by the year-end.
The Australian dollar slipped to its lowest in more than two months after the Reserve Bank of Australia left interest rates unchanged and gave a somewhat cautious assessment of the local economy.
The dollar index against a basket of six major currencies was up 0.3 per cent at 93.848 after touching 93.891, its highest since Aug. 17.
On track for its third straight day of rises, the benchmark 10-year Treasury yield US10YT=RR edged up to 2.351 per cent after briefly touching a three-month high of 2.371 per cent overnight.
Debt yields and equities rose- Wall Street shares reached record highs - after a measure of US manufacturing activity for September released on Monday showed a surge to a 13-1/2-year high.
The euro was down 0.2 per cent at $1.1708 EUR= after brushing $1.1702, its weakest since Aug. 17.
The common currency had already slid 0.7 per cent overnight against a data-boosted dollar.
The euro also took a knock on Monday as Spain faced its biggest constitutional crisis in decades after Sunday’s independence referendum in Catalonia.
The dollar, which initially fell to 112.660 yen early in the session, was up 0.35 per cent at 113.150 yen JPY=. A rise above 113.260 would take the greenback to its highest since mid-July.
Still, some saw the dollar facing turbulence against the yen in the coming sessions as traders considered the implications of Japan’s snap general election later in the month.
Ishizuki at Daiwa Securities pointed out that one-month dollar/yen risk reversals showed dollar puts are more popular.
Market participants try to hedge against currency risk and volatility through the use of risk reversals, in which “puts” give them the option to sell.
Japanese Prime Minister Shinzo Abe last week dissolved the parliament’s lower house and called a snap election for Oct. 22.
The Australian dollar fell 0.4 per cent to $0.7792 AUD=D4, its lowest since July 18, after the RBA's policy decision on Tuesday.
The RBA kept interest rates on hold at a record low of 1.5 per cent as widely expected while noting that a stronger local currency would slow the economy and restrain price pressures.