The dollar traded below a five-month high against a basket of currencies on Tuesday, catching its breath after a broad rally inspired by rising US bond yields and relief at an easing of US-China trade tensions.

The dollar's index against a basket of six major currencies last traded at 93.551, down from a five-month high of 94.058 set on Monday. The greenback's surge to that Monday peak had marked a gain of 5.4 per cent in about a month, compared to a mid-April trough of 89.229, which was its lowest since late March.

A pull-back in US 10-year Treasury yields from seven-year highs set last week likely prompted traders to book some profits on their bullish dollar bets, said Stephen Innes, head of trading in Asia-Pacific for Oanda in Singapore. “We came a long way...so ultimately we are going to get profit-taking,” Innes said.

He noted that while the dollar's near-term outlook still looks positive, one factor worth watching was whether business sentiment and the economic outlook in developed countries other than the United States would start to improve. Such optimism about synchronous global economic growth had been one of the factors that had weighed on the dollar earlier this year.

Over the past month, however, the dollar has been bolstered by generally solid US economic data that has backed the Federal Reserve's monetary policy tightening stance this year, as well as rising US bond yields that bolstered the greenback's yield appeal.

The prospect of a resolution to the US-China trade tensions has further added to the dollar's shine. The US 10-year Treasury yield last stood at 3.0523 per cent , down from Friday's near seven-year-high of 3.128 per cent. Against the yen, the dollar eased 0.1 per cent to 110.96 yen , down from Monday's four-month high of 111.395 yen.

This week, the dollar's fate rests on the Fed, with several of its officials speaking and the minutes of the US central bank's last monetary policy meeting due to be released on Wednesday. Investors will focus on the Fed's inflation outlook. Higher inflation could mean faster interest rate hikes and a stronger dollar.

The euro held steady at $1.1787. On Monday, it fell to as low as $1.1717, touching its lowest level since around mid-November, but later regained some footing. The euro has been affected by concerns over political uncertainty in Italy. This week will bring about a further test for determined euro bulls with the release of “flash” PMI data for May on Wednesday, and markets waiting to see whether the first-quarter slowdown in Europe spilled over to later months.

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