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By Saqib Iqbal Ahmed
NEW YORK (Reuters) -The U.S. dollar fell against a basket of currencies on Monday, tracking a retreat in U.S. Treasury yields from the 5% level hit earlier in the session, and as traders awaited fresh U.S. economic data due later this week.
The yield on the benchmark 10-year U.S. Treasury note declined on Monday after briefly rising above 5.0%, hitting the July 2007 milestone that it briefly attempted to scale last week and further threatening an economic slowdown on higher borrowing costs.
Traders are on watch for several events this week, including a European Central Bank meeting, and the release of U.S. GDP data and the Federal Reserve's preferred inflation gauge.
"A big week of data with eyes on U.S. GDP on Thursday, plus BoC (Bank of Canada) and ECB (European Central Bank) in the mix, and of course geopolitical risk remaining incredibly elevated is really denting traders' desire to do much as the week gets underway," said Michael Brown, market analyst at Trader X in London.
But the main news on Monday was the yield on 10-year U.S. Treasuries reaching as high as 5.021%, the latest stage of a relentless sell-off in government bond markets, driven by investors accepting central banks will keep rates persistently high, particularly in the United States, an increase in supply of bonds and widening term premia.
The 10-year yield was last at 4.8375%.
Besides that, the risk of Israel's war with the Islamist group Hamas becoming a wider regional conflict is keeping markets on edge, as Israeli air strikes battered Gaza early on Monday, and the United States dispatched more military assets to the region.
The dollar index, which measures the currency's strength against a basket of six rivals, was 0.6% lower at 105.56. The index had risen as high as 106.33 earlier in the session.
The surge in U.S. Treasury yields since mid-July has boosted the U.S. dollar's appeal relative to other currencies and helped lift the U.S. dollar index more than 6%, but the index has made little headway since early October.
"It's definitely interesting and surprising that neither the sell-off in long bonds nor the Middle East situation and subsequent haven demand have managed to spark much demand," Trader X's Brown said.
"I remain bullish, however, with the core U.S. economic outperformance theme continuing to ring true against G10 peers, as this week's GDP figures should prove," he said.
Barclays analysts were less sure the dollar had much further to go, however, pointing to stretched long dollar positioning and a smaller likelihood of further rises in long-dated yields without a reassessment of the Fed's rate outlook.