FOREX-Bond selloff boosts dollar, risk currencies knocked lower

* Aussie, Kiwi fall more than 1%
* Pound knocked below $1.39
* Bitcoin slips 5%
* Graphic: World FX rates https://tmsnrt.rs/2RBWI5E

By Ritvik Carvalho
LONDON, Feb 26 (Reuters) - The U.S. dollar rose against most
major currencies on Friday, lifted by an increase in U.S. bond
yields overnight, while risk currencies such as the pound,
Aussie and Kiwi dollar took a knock lower.
Government bonds, and particularly U.S. Treasuries, have
become the focal point of markets globally. Traders have moved
aggressively to price in earlier monetary tightening than the
Federal Reserve and other central banks have signalled.
European stocks extended a global equity sell-off, with risk
appetite souring as the surge in yields triggered inflation
worries. Emerging-market and commodity-linked currencies
continued to retreat Friday.
The dollar move is "a function of what's happening on the
yields side," said Jeremy Stretch, head of G10 FX strategy at
CIBC World Markets. The 10-year yield briefly climbed above the
S&P 500 dividend yield on Thursday, Stretch noted, indicating
"uncertainty that is writ large".
"But I think we're going to continue to see central bankers
pushing against the notion of earlier-than-expected policy
reversal and that, alongside an unwind of some end-month
uncertainty, will provide a more constructive backdrop for the
high beta currencies versus the dollar into the start of next
month," he said.
The dollar index =USD rose to 90.75, up 0.4% on the day
and at its highest level in over a week.
It gained against the yen JPY=EBS , touching 106.52 for the
first time since September. Both the dollar and yen are
considered haven currencies, but the yen tends to decline when
U.S. yields rise, the dollar to strengthen.
Bond yields have climbed this year on the outlook for
massive fiscal stimulus amid continued ultra-easy monetary
policy, led by the United States.
An acceleration in the pace of vaccinations globally has
also bolstered what has become known as the reflation trade,
referring to bets on an upswing in economic activity and prices.
Sterling, a huge beneficiary of the reflation narrative, hit its
lowest in over a week to $1.3890 - over two cents lower than
Wednesday's 2-1/2 year high of $1.4240 GBP=D3 .
In recent days, though, a rise in inflation-adjusted bond
yields has accelerated, indicating a growing belief that central
banks may need to pare back ultra-loose policies, despite their
dovish rhetoric.
The benchmark 10-year Treasury yield US10YT=RR surged
above 1.6% overnight for the first time in a year, after an
auction of $62 billion of seven-year notes was met with weak
demand. The Australian dollar AUD=D4 continued its retreat after
topping $0.80 on Thursday for the first time since February of
2018, declining over 1.5% to $0.7731, its lowest level since Feb
17.
Marshall Gittler, head of research at BDSwiss, said the
Australian dollar was underperforming despite the market
signalling higher growth likely because the country's central
bank's yield curve control policy would restrain its bond yields
moving much higher. That, in turn, could limit the
attractiveness of the currency going forward.
The New Zealand dollar - also known as the Kiwi - dropped
1.3% to $0.7268, its lowest since Feb. 19.
The Canadian dollar CAD=D4 weakened 0.1% to 1.2659 to the
greenback after falling from its own three-year top at 1.2468
overnight.
The euro EUR=EBS slid 0.6% to $1.21050 after touching a
seven-week high of $1.22435 on Thursday.
Bitcoin BTC=BTSP fell 5% to $44,713. Ethereum ETH=BTSP
traded at $1,479 following a 9% drop.

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