Dollar underpinned by U.S. yields, sterling steadies

By Lisa Twaronite

TOKYO (Reuters) - The dollar got support from higher U.S. Treasury yields in early Asian trading on Tuesday, while sterling arrested a recent slide, which followed concerns about Theresa May's ability to stay on as British prime minister.

The dollar index, which tracks the U.S. currency against a basket of six major rivals, was steady on the day at 94.499 <.DXY>.

Against its Japanese counterpart, the dollar inched 0.1 percent higher to 113.70 yen >, but remained below its eight-month high of 114.735 hit last week.

"The dollar is getting support from U.S. yields, but I am actually surprised that it did not go higher, so perhaps the correlation between yields and the dollar is breaking down," said Masashi Murata, currency strategist for Brown Brothers Harriman in Tokyo.

 

"But with the Fed expected to hike rates in December, the dollar could go higher" in the coming weeks, he said.

The yield on two-year U.S. Treasury notes scaled a nine-year peak on Monday, as the yield curve resumed its flattening and investors priced in a 25-basis-point interest rate hike by the Federal Reserve next month. [US/]

The 10-year Treasury yield > rose to 2.405 percent from its U.S. close on Monday of 2.400 percent. It was at 2.304 percent as early as Nov. 8.

The euro was steady at $1.1670 >, holding well above last week's a 3-1/2-month low of $1.1553.

Sterling edged up 0.1 percent to $1.3122 after coming under pressure from political turmoil ahead of this week's debate by British lawmakers about the government's plan to leave the European Union.

The debate on the Brexit bill kicks off on Tuesday and Wednesday, and takes place against an unstable political backdrop. As many as 40 of May's lawmakers would support a no-confidence motion against her, according to the Sunday Times newspaper.

Also in focus this week, European Central Bank chief Mario Draghi, Federal Reserve Chair Janet Yellen, Bank of Japan Governor Haruhiko Kuroda and Bank of England head Mark Carney will form a panel on central bank communication at the ECB-hosted conference in Frankfurt later on Tuesday.

(Reporting by Lisa Twaronite; Editing by Sam Holmes)