* Graphic: World FX rates https://tmsnrt.rs/2RBWI5E
By Hideyuki Sano
TOKYO, April 7 (Reuters) - The dollar softened to a two-week
low against a basket of currencies on Wednesday after U.S. bond
yields declined as traders rolled back aggressive expectations
that the Federal Reserve will tighten its policy earlier than
pledged.
The dollar index wallowed near a two-week low of 92.314
=USD , slipping further from a five-month high of 93.439 set on
March 31.
The euro rallied to a two-week high of $1.18785 EUR= and
last stood at $1.1871. The common currency jumped almost a pence
against the British pound overnight to trade at 85.90 pence
EURGBP=D4 , its biggest gain since Dec. 10.
The dollar changed hands at 109.77 yen JPY= , extending its
retreat from a one-year high of 110.97 touched a week ago.
The dollar's decline came as investors recalibrated their
expectations that the Federal Reserve will tighten its policy
earlier than it has suggested.
Financial markets have expected accelerating U.S. economic
growth and inflation could force the Fed to abandon its pledge
earlier, with interest rate futures pricing in a rate hike as
early as late 2022 earlier this week.
The five-year U.S. Treasury yields, however, dropped sharply
to 0.874% US5TY=TWEB after hitting a 14-month high of 0.988%
on Monday.
The five-year Treasury yield is now seen as a major
barometer of how much faith investors have in the Federal
Reserve's pledge that it does not expect to raise interest rates
until 2024.
Traders saw the dollar's retreat as a correction after its
rally last month. In particular, against the yen, the dollar
made its biggest monthly gains in more than four years in March,
rising almost 4%.
"Last quarter, the dollar got a boost from the Senate
runoff in Georgia, Biden administration's coronavirus relief
package and then infrastructure plan. This quarter we are
running out of such big themes and the market will be looking to
economic fundamentals. We expect the dollar to remain strong but
it is unlikely to rise as much as it did last quarter," said
Shinichiro Kadota, senior currency strategist at Barclays.
Elsewhere the Australian dollar held firm near two-week high
against the dollar at $0.7661 AUD=D4 while the British pound
slipped to $1.3830 GBP=D4 from Tuesday's two-week high of
$1.3910.
Bitcoin was flat at $57,966 BTC=BTSP .
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