LONDON (May 10): The dollar held firm on Thursday underpinned by gains in long-term U.S. Treasury yields and investors focused on U.S. consumer price data later in the day that could show inflation rising.
The dollar index stood little changed against a basket of six major currencies .DXY, =USD at 93.06 after hitting a 4-1/2-month high of 93.42, extending its gains from its April low to 4.7 percent.
"The market is focused on interest rates today," said Ulrich Leuchtmann, head of FX strategy at Commerzbank.
"The U.S. exit from the Iran nuclear deal has not had much of an impact so it's become a risk-off environment where interest rate differentials get to decide where the dollar goes next," he said.
A three-week long rally for the U.S. currency, in which it has reversed several months of weakness, has caused the unwinding of popular long bets on emerging market and G10 currencies.
U.S. yields have risen in recent weeks with 10-year bond yields above a psychologically important 3 percent on Wednesday, edging near a 2014 peak of 3.041 percent.
U.S. consumer price data due at 1230 GMT is expected to show that annual core CPI inflation USCPFY=ECI rose to 2.2 percent in April, which would be the highest in more than a year, from 2.1 percent in March.
The euro hit a 4-1/2-month low of $1.1823 on Wednesday, having fallen in six of the last seven sessions. It last traded at $1.1868.
Discussions on forming a new government in Italy to end nine weeks of political stalemate are continuing and could remain a source of market volatility.
Italian government bond yields jumped to a seven-week high on an increased possibility that a government of anti-establishment parties comes into power in the euro zone's third largest economy.
The British pound hovered above Monday's four-month low as traders expect the Bank of England to keep rates on hold at its meeting later in the day as a weak UK economic data and renewed worries about Brexit have led markets to price out the possibility of a rate hike this month.
The pound was up 0.1 percent at $1.3561 not far from $1.3485 touched on Monday.
The New Zealand dollar shed as much as 1.1 percent to a five-month low of $0.6916 after the Reserve Bank of New Zealand held interest rates steady and said the next move in rates could just as easily be a cut as a hike.