FOREX-Dollar falls back from 3-1/2 month highs as yields stabilise

* Dollar index off 3-1/2 month highs
* Eyes on Treasury auctions, Fed meeting
* Risk currencies rise
* Graphic: World FX rates https://tmsnrt.rs/2RBWI5E

By Ritvik Carvalho
LONDON, March 9 (Reuters) - The dollar on Tuesday fell back
from 3-1/2 month highs as U.S. Treasury yields stabilised,
allowing room for riskier currencies such as the pound,
Australian dollar and Kiwi dollar to make gains.
The index that measures the dollar's strength against a
basket of other currencies was 0.4% lower by midday in London,
at 92.003, after hitting a 3-1/2 month high of 92.506 during
Asian trading hours =USD .
U.S. 10-year Treasury US10YT=RR yields fell as low as
1.5230%, down for a second day and off last week's high of
1.6250%.
Traders are wary yields could rise further this week as the
market will have to digest a $120 billion auction of 3-, 10-,
and 30-year Treasuries, especially after last week's soft
auction and a 7-year note sale that saw a spike in yields.
"Stability is likely to remain the theme of the day ahead of
the UST auctions and the US inflation release tomorrow, which
are the near-term risks for FX markets (given the possible
negative spillover into USTs and the risk of a further
sell-off)," said ING strategists Chris Turner, Francesco Pesole
and Petr Krpata in a daily note.
"Near-term, the currencies of oil exporters should be
favoured over low yielders in the G10 FX space, with the rising
oil price providing an offsetting factor to the challenging
global risk environment."
The Norwegian crown NOK= , an oil-linked currency, gained
0.7% to 8.4789 per dollar. Oil prices have climbed in recent
days on expectations of a recovery in the global economy and on
a likely drawdown in crude oil inventories in the United States,
the world's biggest fuel consumer. They shot up on Monday after
an attack on a Saudi Arabian oil export facility.
The Australian dollar AUD= and New Zealand dollar NZD=
gained 0.8% to $0.7702 and $0.7165 respectively.
The euro EUR=EBS rose half a percent to $1.19155 and
sterling GBP=D3 gained 0.4% to $1.3871, both currencies
benefiting as the dollar took a breather.
The dollar index has firmed more than 2% year-to-date, as
upbeat macroeconomic data, combined with accommodative monetary
policy, has lifted bond yields and hit highly valued U.S.
technology stocks.
The greenback's rise comes in the face of broadly bearish
forecasts laid out at the start of this year. Analysts at BCA
Research put the currency's gains down to three reasons.
"First, the dollar was very much oversold, with net
speculative positioning heavily short and sentiment close to a
bearish nadir. As such, a rebalancing in positioning was to be
expected."
"Second, the rise in U.S. interest rates has increased the
appeal of the USD, particularly against currencies such as the
euro and the yen. Finally, and on a related note, economic
momentum has been improving in the US of late, compared to other
G10 countries," they said in a note to clients.
All eyes will now be on the U.S. Federal Reserve's two-day
meeting next week, although expectations are low that the
central bank will announce major policy changes after Chair
Jerome Powell last week did not express concern about the rise
in bond yields.

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