FOREX-Dollar strengthens, euro drops, investors wait for Powell testimony

* Dollar index rises as markets turn cautious
* Kiwi dollar drops 1.4% on housing market curbs
* Turkish lira stabilises
* Graphic: World FX rates https://tmsnrt.rs/2RBWI5E

(Updates prices, adds commentary and detail)
By Elizabeth Howcroft
LONDON, March 23 (Reuters) - The dollar rose and the euro
fell on Tuesday, as markets focused on divergent reactions to
the recent rise in government bond yields, while the New Zealand
dollar dropped to a three-month low on new measures to cool the
housing market.
There was a cautious tone in global markets, with equities
in the red, after a weak Asian session led by declines in
Chinese markets.
The United States, the European Union, Britain and Canada
sanctioned Chinese officials on Monday over human rights abuses
in Xinjiang. Beijing hit back with punitive measures against
European lawmakers, diplomats, institutes and families.
Also contributing to market caution was a third wave of the
COVID-19 pandemic in Europe. Germany is extending its lockdown
and urging citizens to stay at home for five days over the
Easter holidays, Chancellor Angela Merkel said. "The common currency looks set to remain quite vulnerable on
the back of virus-related developments," ING strategists said in
a note to clients.
The European Central Bank's chief economist, Philip Lane,
said that the central bank would do its part to keep government
bond yields ultra-low. The dollar index was up 0.3% at 92.111 at 1152 GMT =USD .
Euro-dollar was down 0.4% at $1.1882 EUR=EBS .
The dollar index has gained around 2.4% so far in 2021, as
speedy rollouts of COVID-19 vaccines in the United States and
the Biden Administration's $1.9 trillion stimulus are seen
lifting growth, driving up bond yields and drawing investors.
Investors perceive the ECB as more concerned about the rise
in yields, and therefore less likely to tighten monetary policy,
than the U.S. Federal Reserve, and that this is fuelling dollar
gains, said Ulrich Leuchtmann, head of FX and commodity research
at Commerzbank.
"Market participants, not for 2021, not for the best part of
2022, but somewhere in the foreseeable future expect the Fed to
normalise monetary policy, and this is certainly something which
keeps U.S. dollar strong and keeps euro-dollar safely below
$1.20," Leuchtmann said.
Market participants will be listening to Congressional
testimony by U.S. Federal Reserve Chair Jerome Powell and
Treasury Secretary Janet Yellen later in the day for any hints
about their tolerance for rising yields, which could determine
the future direction for the dollar.
"Every time Powell shows up in public, there's certainly a
risk that he might change his mind and be more outspoken about
the risk of rising yields, and this would then immediately end
the dollar's strength that we are seeing at the moment,"
Leuchtmann said.
The level of demand at a two-year Treasury auction later in
the session will also be closely watched.
Elsewhere, the New Zealand dollar fell overnight and
extended its losses as European markets opened, dropping to a
three-month low against the U.S. dollar NZD=D3 .
At 1203 GMT, it was down 1.7% on the day at 0.70385
NZD=D3 .
The drop was triggered by the New Zealand government's
introducing measures to curb speculation on its red-hot housing
market, where house prices have risen 23% in 12 months. The kiwi
fell as the reforms lessened expectations for policy tightening.
"The government measures will help to take pressure off the
RBNZ (Reserve Bank of New Zealand) to address risks to financial
stability from the housing market, and thereby delay the need to
hike rates in response," MUFG currency analyst Lee Hardman wrote
in a note to clients.
The Australian dollar - considered a liquid proxy for risk -
also took a hit and was down 1% at 0.7671 versus the U.S. dollar
AUD=D3 . Turkey's lira stabilised somewhat, having plunged 7.5% on
Monday after President Tayyip Erdogan sacked the hawkish central
bank chief. It was down around 1.4% against the U.S. dollar,
with the pair changing hands at 7.9115, compared with Monday's
low of 8.485 TRYTOM=D3 .

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World FX rates https://tmsnrt.rs/2RBWI5E
Turkey Lira https://tmsnrt.rs/3lHvBpB
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