Dollar rises with higher U.S. yields, sterling slumps

By Richard Leong

NEW YORK (Reuters) - The dollar gained against a basket of currencies on Thursday on higher U.S. bond yields and expectations of more rate increases from the Federal Reserve, while sterling fell to a near two-week low on perceived dovish remarks from the head of the Bank of England.

Recent economic data suggested business activities overseas may have peaked. This has reduced the appeal of the euro, yen, pound and other currencies which have strengthened against the dollar since 2017 based on the view economies outside the United States had been faring better until recent weeks.

The relatively optimistic backdrop in the United States should support the Fed to raise short-term rates at least twice more in 2018, traders and analysts said.

"People are looking at the next potential rate hike whether we get two or three more this year," said Minh Trang, senior foreign exchange trader at Silicon Valley Bank in Santa Clara, California.

An index that tracks the greenback versus the euro, yen, sterling and three other currencies (DXY) rose 0.28 percent, to 89.877 after touching a one-week peak.

The euro (EUR=) was last down 0.21 percent, at $1.2346, while the dollar was 0.10 percent higher at 107.34 yen.

The U.S. economy, while not firing on all cylinders, has remained on a steady growth path which has assured the Fed to stick with its current pace of rate increases.

This has propelled the two-year Treasury yield (US2YT=RR) to 2.436 percent, its highest level since September 2008. Its yield gap over two-year German Bunds has reached its widest level in over three decades. The hefty 3 percentage point yield premium has supported some overseas demand for the dollar, analysts said.

On the other hand, the dollar faces headwinds from the uncertainty stemming from U.S. President Donald Trump's trade and economic policies, as well as political events in the Middle East and elsewhere.

"There is a little bit of fatigue with the trade war issue and the global economic cycle is losing momentum, especially in the euro zone whereas the U.S. is holding up," said Christin Tuxen, an FX strategist at Danske Bank in Copenhagen.

Investors are growing nervous that the euro zone economy's rebound is nearing the top and the European Central Bank may move more slowly to tighten monetary policy.

Bank of England Governor Mark Carney on Thursday acknowledged the recent mixed domestic economic readings, which reinforced the view the BOE would raise rates gradual over next few years. His comments knocked the pound to near two-week low against the dollar .

Sterling was last down 0.85 percent at $1.4085.

(GRAPHIC: World FX rates in 2018 - http://tmsnrt.rs/2egbfVh)