FOREX-Dollar strengthens as U.S. yields spike, pound falls to one-week low

* Dollar lifted by rise in yields
* Pound falls to over one-week low
* 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 the pound dropped to its lowest in over
a week.
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 fomented inflation
worries. Emerging-market and commodity-linked currencies
continued to retreat Thursday. Cryptocurrencies stabilised after
tumbling overnight.
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 edged up to 90.39, holding on to a
0.2% rise from Thursday, when it rebounded from losses of as
much as 0.26% before a bond tender. That leaves it down less
than 0.2% for the month, following January's 0.6% gain.
The dollar lost 0.1% to trade at 106.115 yen JPY=EBS after
earlier touching 106.43 for the first time since September. It
has strengthened 2.8% this year after the first back-to-back
monthly increases since mid-2018, putting the yen among the
worst-performing major currencies in 2021.
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 $1.3901, losing 0.6% to the dollar on
the day. 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 fixed income rout is shifting into a more lethal phase
for risky assets," after initially being interpreted as a "story
of improving growth expectations," Westpac strategists wrote in
a client note.
"It appears to be the case that bond markets are 'taking on'
the central bankers' world view, and standing in front of the
current momentum is unwise."
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 0.6% to $0.78050.
New Zealand's currency dropped 0.4% to $0.7336 after
reaching $0.7463 Thursday, a level not seen since August 2017.
The Canadian dollar CAD=D4 weakened 0.1% to C$1.2620 after
falling from its own three-year top at C$1.2468 overnight.
The euro EUR=EBS slid 0.3% to $1.2142 after touching a
seven-week high of $1.22435 on Thursday.
Bitcoin BTC=BTSP slid 5% to $44713. Ethereum ETH=BTSP
traded at $1,479 following a 9% drop.

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