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FOREX-Dollar sets pace ahead of key central bank meetings

·3 min read

* Graphic: World FX rates https://tmsnrt.rs/2RBWI5E

By Saikat Chatterjee

LONDON, March 15 (Reuters) - The dollar gained for a second consecutive session on Monday as traders cut their bearish dollar bets to four-month lows on rising U.S. Treasury yields ahead of key central bank meetings.

Gains in the greenback were more pronounced against low-yielding currencies such as the euro and the British pound while high-yielding currencies like the Australian dollar fared relatively better.

"Monday's trading theme is a continuation of the pattern we have seen in March and we have to see what the Fed does later this week to see if the rise in bond yields and dollar strength versus low yielders can carry on," Kenneth Broux, an FX strategist at Societe Generale in London, said.

The U.S., Japanese and British central banks, along with those in some key emerging markets, are all set to meet this week, with benchmark 10-year Treasury yields trading at 1.6320% on Monday, close to Friday's top of 1.6420%, a level last seen in February.

Rising U.S. yields have lifted the greenback 2% so far this year thanks to widening interest rate differentials relative to other major bond markets. The dollar declined more than 4% in the last quarter of 2020.

The dollar index, which tracks the U.S. currency against six major peers, held at around 91.84 in early London trading. It hit a late November 2020 high of 92.51 last week.

The U.S. currency has been supported by a paring of bets for its decline, with speculators cutting net short positions to the lowest since mid-November in the week ended March 9.

Rising bond yields will continue to focus minds this week before a Federal Reserve meeting at which some analysts expect policymakers to strike an optimistic tone on the U.S. economy.

While there are some expectations that the Fed might try to calm bond markets -- yields have risen some 60 bps since the last Fed meeting -- the consensus view is Fed Chief Jerome Powell will not make changes to policy settings.

"The Fed is not expected to tinker with its monetary policy but instead communicate via forecasts that the situation is under control and that markets are running way ahead of themselves," SEB analysts said in a note.

U.S. producer prices increased strongly in February, leading to the largest annual gain in nearly 2-1/2 years, with the economy set for a massive shot in the arm from President Joe Biden's $1.9 trillion stimulus package.[

The greenback rose 0.01% against the yen to 109.05 , drifting to its highest since June 2020.

The euro weakened 0.2% to $1.1925 after rising last week for the first time in three weeks as latest data showed hedge funds slashed their net euro positions.

Defeat in two regional votes on Sunday for Germany's ruling Christian Democrats (CDU) ahead of federal elections in September also weighed on sentiment.

The Australian dollar -- viewed widely as a liquid proxy for risk appetite -- fell 0.2% to $0.7745, extending Friday's 0.4% loss.

Bitcoin weakened more than 5% after surging to a record high of $61,781.83 over the weekend.

(Reporting by Saikat Chatterjee; Editing by Catherine Evans and Alexander Smith)