By Hideyuki Sano

TOKYO (Reuters) – The dollar stood firm against its low-yielding peers on Tuesday on bets of a faster economic recovery and greater tolerance of higher U.S. bond yields, while the Australian dollar looked to guidance from the country’s central bank.

The dollar index last stood at 91.014, having hit a three-week high of 91.139 overnight, with its February peak of 91.600 seen as a possible next target.

The U.S. currency rose to 106.89 yen on Monday, its highest since late August, and last stood at 106.84 yen while the euro dipped to $1.2049, near its lowest level in almost two weeks.

The common currency was under pressure as top officials from the European Central Bank sounded alarm over rises in bond yields.

President Christine Lagarde said on Monday the ECB will prevent a premature increase in borrowing costs for firms and households.

Policymaker Francois Villeroy de Galhau was even more explicit, saying some of the recent rises in bond yields were unwarranted and that the ECB must push back using the flexibility embedded in its bond purchase programme.

Traders were quick to sense the marked difference in tone between the ECB and the Federal Reserve.

Richmond Federal Reserve President Thomas Barkin said on Monday the uptick in long-term bond yields so far seems to suggest an adjustment to stronger growth and inflation outlook.

Atlanta Fed President Raphael Bostic said last week that bond yields remain comparatively low, while Federal Reserve Chair Jerome Powell has also shown no undue concerns about rising bond yields.

“Central banks continue to take diverging views on the signals sent by the recent rise in yields. The U.S. Fed is taking it as a positive signal,” Tapas Strickland, director of economics and markets at National Australian Bank in Sydney, said in a note.

The U.S. economic recovery is also seen on a firmer ground, already bolstered by prospects of a $1.9 trillion relief package from the Biden Administration and successful rollouts of COVID-19 vaccinations.

A survey by the Institute for Supply Management (ISM) released on Monday showed U.S. manufacturing activity increased to a three-year high in February amid a surge in new orders.

As a result, the gap between U.S. and European bond yields has been widening in a boost to the dollar; the 10-year yield differentials between U.S. Treasuries and German Bunds reached 1.76% on Monday, the highest in a year.

The safe-haven Swiss franc softened to a near four-month high of 0.9160 franc per dollar overnight and last stood at 0.9146.

Against the euro, the franc changed hands at 1.1023 to the euro, not far from a 1-1/2-year low of 1.1098 touched last week.

The Australian dollar traded at $0.7774, having risen 0.75% on Monday on rising risk appetite, with focus now squarely on the looming policy meeting of the Reserve Bank of Australia.

The RBA’s monthly policy meeting on Tuesday is widely expected to reinforce its forward guidance for three more years of near-zero rates.

It has stepped up bond buying following the global bond market rout, and any further warning against rising yields could cap its latest rebound, analysts said.

“The market has been in a euphoria for some time and everybody says the dollar will weaken on rising risk appetite. But oil prices dipped yesterday and gold also slipped. If commodity markets are waking up to the reality, then we could see some weakness in commodity-linked currencies,” said Makoto Noji, chief FX strategist at SMBC Nikko Securities.

Elsewhere, bitcoin also jumped back in tandem with gains in risk assets, trading at $49,129 and pulling away from Sunday’s three-week low of $43,021.

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