January 30, 2018 / 11:39 AM / in 7 months

FOREX-Dollar reverses gains as bond yields soften

* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh

By Saikat Chatterjee and Tommy Wilkes

LONDON, Jan 30 (Reuters) - The dollar reversed earlier gains on Tuesday and turned lower as U.S. Treasury yields pulled back from their recent move higher while the euro strengthened after economic data confirmed the euro zone economy is growing at a healthy clip.

The greenback is set for its biggest monthly decline since July 2017 against the euro, as the combination of strong global growth - notably in Europe - and slow inflation encouraged investors to add bearish bets.

But a spike in global bond yields, with 10-year U.S. bond yields pushing well above 2.70 percent, its highest since April 2014, prompted some investors to cut some short positions and pushed the dollar higher on Monday.

But with global risk sentiment nervous with equity markets broadly in the red, the spike in bond yields proved to be short lived.

The dollar was down 0.2 percent against a basket of six major currencies at 89.161 , having pulled up from a low of around 88.43 set last week, its weakest level since December 2014.

Analysts said a renewed rise in U.S. bond yields this week still lent some support to the dollar. The U.S. 10-year Treasury yield reached a peak of 2.733 percent in Asian trading on Tuesday, the highest since April 2014, before slipping back.

The euro gained 0.3 percent to $1.2420, still a way from a three-year high of $1.2538 touched last week.

“There is a pause in the dollar’s weakness, at least for now,” said Teppei Ino, an analyst for Bank of Tokyo-Mitsubishi UFJ in Singapore.

Market participants are probably waiting for Trump’s State of the Union speech, due later on Tuesday, for anything further he might have to say about the dollar, Ino said.

Treasury Secretary Steven Mnuchin gave U.S. currency bears a major boost last week with a tacit endorsement of a weak dollar. Trump later tried to row back from those comments, saying he ultimately wants the dollar to be strong.

Trump said on Monday he will address his proposed immigration overhaul in his State of the Union speech as well as his efforts to lower trade barriers around the world for American exports.

The dollar’s gain also comes at a time when risk sentiment is at the back foot with Asian stocks falling and European stocks stumbling.

Sterling, a currency highly correlated to risk-on sentiment, briefly fell below the $1.40 line for the first time in a week before climbing back above the level.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets (Reporting by Saikat Chatterjee; Additional reporting by Masayuki Kitano; Editing by Louise Heavens/Jeremy Gaunt)

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