The euro rose towards recent two-month high against a softer dollar on Wednesday, buoyed by rising German 10-year Bund yields that hit their highest this year and narrowed the gap over US Treasuries.

The euro was also helped by business surveys that pointed to nascent signs of a pick up in the euro zone and news that Greece has made a €200-million interest payment to the International Monetary Fund that fell due on Wednesday.

The yield gap between US 10-year Treasury yields and their German counterparts shrank to about 165 basis points, the narrowest since late March.

As a result, the euro rose 0.6 per cent to $1.1264 in early European trade, edging back in the direction of a two-month high of $1.1290 set on Friday.

“The sell-off in Bunds and the rising yields is helping euro/dollar,’’ said Yujiro Goto, currency strategist at Nomura. “We think, given how significantly short the market is on the euro, there is scope for the euro to rise further in the short-term, especially if the sell-off in Bunds continues.’’

Bund yields

Benchmark 10-year Bund yields now trade at 0.55 per cent, having hit a record low of 0.05 per cent last month, when many investors expected them to turn negative. Spanish and Italian bond yields also rose close to 2 per cent.

Mitul Kotecha, head of currency strategy for Asia-Pacific at Barclays in Singapore, said recent moves in yield differentials seemed to be weighing on the dollar.

“We are seeing US yields higher, but at the same time yields elsewhere are also rising,’’ he said. “Even though US yields are moving higher, the differential certainly with the likes of the euro and Aussie dollar has worsened,’’ Kotecha said.

Dollar index

The dollar index, which measures the greenback’s value against a basket of currencies, fell 0.4 per cent to 94.687, pulling away from a one-week high of 95.946 hit on Tuesday.

The dollar was also on the defensive after disappointing US trade data for March painted an even bleaker picture of the economy in the first quarter.

Later on Wednesday, the focus will shift to a report on US private-sector employment that may affect expectations for Friday’s US non-farm payrolls report.

Recent indicators, including a drop in jobless claims to a 15-year low in the week ended April 25, point to an improvement in the US labour market, analysts said.

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