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FOREX-Dollar slips as bond yields drop and investor sentiment strengthens
Published at 03/03/2021 at 08:34

* Dollar heads low, commodity currencies rally

* Sterling edges higher ahead of UK budget

* Graphic: World FX rates

By Saikat Chatterjee

LONDON, March 3 (Reuters) - The U.S. dollar fell on Wednesday as investor sentiment improved and government bond yields extended their retreat, while commodity-linked currencies such as the Australian and Canadian dollars rose.

The lower U.S. bond yields also sapped some of the dollar's appeal among low-yielding currencies, with the yen and Swiss franc recovering from multi-month lows overnight.

Bonds have been at the centre of a storm in markets in recent weeks, following a jump in yields globally. Investors were betting an economic recovery would lift inflation and lead central banks to normalise monetary policy as economies recover from the COVID-19 pandemic.

Global stocks dropped from near record highs and prices of commodities wobbled.

But this week has seen some calm return to the market, with yields dropping and stocks rising.

An index of the dollar against six of its major peers slipped to 90.971 after dropping back from a nearly one-month high overnight.

Analysts said they expected Federal Reserve Chair Jerome Powell to reiterate on Thursday recent comments from fellow policymakers that any rises in rates would be gradual and that the U.S. economy was still far from the Fed's goals.

"The Fed is rightly more concerned about the speed of the move rather than the move higher in yields. The comments should help to dampen volatility in the bond market and the U.S. dollar's upward momentum in the near-term," MUFG analysts said in a note.

The Aussie rose 0.1% to $0.7828, building on gains of about 0.7% the previous two days, after data showed the Australian economy grew much faster than expected in the fourth quarter.

The Norwegian crown , another commodity-linked currency, traded mostly higher against the dollar and the euro after advancing about 1% in each of the past two sessions.

The euro was little changed at $1.2086 after rising more than 0.3% in the previous session, when it rebounded from an almost one-month low below $1.20.

European Central Bank board member Fabio Panetta said the bloc's monetary authority should expand bond purchases or even increase the quota earmarked for them if needed to keep yields down.

"Equity market reaction will be one of the key determinants of the impact of this move in global rates on FX markets," said Shinichiro Kadota, senior currency strategist at Barclays in Tokyo.

The lull in volatility could prove fleeting if an improving U.S. economy re-ignites bond selling, with closely watched monthly payroll figures due on Friday.

Sterling traded 0.1% higher at $1.3973 before the UK budget' release, due at 1230 GMT.

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(Reporting by Saikat Chatterjee, additional reporting by Stanley White in Tokyo; editing by Larry King)

((vidya.ranganathan@thomsonreuters.com; Reuters Messaging: vidya.ranganathan.thomsonreuters.com@reuters.net))