The US dollar fell and the euro strengthened on Tuesday as investors reacted to a sharp drop in US bond yields caused by dovish Federal Reserve comments, as well as the prospect of stimulus from China.
Currency movements were modest as traders waited for more Fed officials to speak in the afternoon, as well as minutes from the Fed's last meeting to be released on Wednesday and US inflation data on Thursday. Investors also monitor the conflict between Israel and Palestine.
The euro has so far strengthened 0.27% against the US dollar at $1.0591. Bloomberg reports that China is considering issuing at least 1 trillion yuan ($137.1 billion) of additional government debt to shore up its troubled economy, helping currencies like the euro that are seen as more vulnerable to global growth gain momentum.
The US dollar index, which measures the US dollar against six other currencies, was last up less than 0.1% at 106.05. It remained below last week's 11-month high of 107.34 and traded at roughly the same level as the previous week.
US bond yields fell sharply on Tuesday as trading opened after the Columbus Day holiday. A drop in global borrowing costs helped boost Asian and European stocks.
"With US bond yields falling significantly this morning in cash trade and that allowing for a more constructive session for European shares, it appears that currency traders are more comfortable switching out of the dollar," said Simon Harvey, head of FX analysis at Monex Europe. .
"This sentiment has been supported by the news that China will increase its fiscal spending, although we think this only boosts sentiment at the moment as the details are a bit fuzzy."
The yen traded higher early, against the US dollar which rose 0.38% to 149.06 yen. The Japanese currency jumped after the Kyodo news agency reported that the Bank of Japan was considering raising its core consumer inflation forecast this year, but then canceled it.
Analysts said the decline in US bond yields was due to comments by two Fed officials on Monday that a rise in long-term yields would likely negate the need for further hikes, and also that traders were opting for a safe haven amid geopolitical uncertainty.
The 10-year US bond yield, which moves inversely to prices, was last down 7 basis points to 4.709%. It hit its highest level since 2007 last week at 4.887%.
Fed officials Raphael Bostic, Christopher Waller, Neel Kashkari, and Mary Daly are expected to speak early Wednesday morning.
