LONDON - Signs that Asia is already feeling the pinch from a trade conflict between the United States and China triggered some safe haven flows to the U.S. dollar on Tuesday, while higher U.S. Treasury yields made the trade more palatable.
Surprisingly soft economic growth data from Singapore and Thailand have raised worries that major Asian economies will be hurt by global trade tensions.
Meanwhile, Australia's top policymaker Philip Lowe said on Tuesday the RBA will consider the case for lower interest rates at its June policy meeting, pushing the Aussie dollar lower half a percent to $0.6873.
"The situation in Asia is difficult - Thailand, Singapore, export decline in Korea - which shows that the trade conflict is hurting even without a further escalation," said Commerzbank FX strategist Esther Maria Reichelt.
"This is the main cause behind the dollar strength, if anything I was little bit surprised we didn't see a more pronounced risk movement," she added.
The dollar hit a 2-1/2 week high against a basket of six major currencies, rising 0.2% to 98.11 in early European trade.
It may have also been helped by higher U.S. Treasury yields, with the 10-year yield rising to a one-week high of 2.428% on the back of some positive comments on the U.S. economy from policymakers.
Yields also rose as the U.S. government temporarily eased trade restrictions imposed last week on China's Huawei, a move aimed at minimising disruption for its customers.
Conversely, the euro -- which makes up a significant chunk of that basket -- hit a 2-1/2 week low of $1.1144.
While this is primarily on the dollar move, the single currency is also being hurt by upcoming European parliamentary elections in which eurosceptic parties may fare well.
A successful outing for right-wing Italian parties in particular could mean new domestic elections in the euro zone's third largest economy, and potentially a new coalition of right wing parties led by Matteo Salvini's League.
"That would be decidedly negative for the euro, because Salvini has been much less willing to abide by EU rules – he recently said he'd break the EU's budget deficit rules if necessary to get employment up," said Marshall Gittler, a strategist at ACLS Global.
Sterling fell below $1.27 for the first time since mid-January ahead of a UK cabinet meeting in which senior ministers will consider the merits of whether lawmakers should hold indicative votes on Brexit options.