FOREX-Dollar near 3-1/2-month peak bolstered by rising US bond yields

* Dollar index steadies near peak hit on Wednesday

* U.S. 10-year Treasury yield stays above 3 percent

* Euro’s moves subdued ahead of ECB policy decision

* Dollar poised for best month vs yen since Nov 2016 (Updates prices, adds comments)

By Masayuki Kitano

SINGAPORE, April 26 (Reuters) - The dollar traded near a 3-1/2-month high against a basket of currencies on Thursday, bolstered by higher U.S. Treasury yields, led by the 10-year benchmark breaching the 3 percent threshold this week for the first time in four years.

The 10-year U.S. Treasury yield set a fresh four-year high of 3.035 percent on Wednesday, driven by worries about the growing supply of government debt and inflationary pressures from rising oil prices.

A rise to levels beyond 3.041 percent would take the U.S. benchmark 10-year yield to its highest since July 2011.

The recent jump in U.S. bond yields has caused U.S.-Japan and U.S.-German yield differentials to widen further in the dollar’s favour, leaving the yen and the euro lower.

“Unless there is a very unlikely massive meltdown in U.S. equity markets, it is doubtful the Fed will waver on a June rate hike,” Stephen Innes, head of trading in Asia-Pacific for Oanda in Singapore wrote in a note.

“With equity market sentiment holding firm in the face of rising bond yields, the almighty dollar could move through G-10 currency markets like a wrecking ball,” Innes added.

The dollar’s index against a basket of six major currencies was at 91.136, having risen to a high of 91.261 on Wednesday, its strongest since Jan. 12.

Wall Street limped into positive territory on Wednesday on optimism over a spate of upbeat earnings, although that was nearly offset by jitters over rising U.S. bond yields and corporate costs.

The euro rose 0.2 percent to $1.2179 but was still within sight of a near two-month low of $1.2160 set on Wednesday.

The near-term focus is on the European Central Bank’s rates review due later on Thursday.

The ECB is set to keep policy unchanged on Thursday, playing down worries over recent softness in the euro zone economy and leaving the door open to ending its lavish bond purchase scheme by the close of the year.

YEN’S APRIL WOES

Against the yen, the dollar set a 2-1/2-month high of 109.49 yen but later eased to 109.30 yen, down 0.1 percent.

The dollar may soon test some key technical levels near 110 yen, said Teppei Ino, analyst for MUFG Bank in Singapore.

One key level for the dollar is 109.65 yen, a 50 percent retracement of its November to March decline, and another is its 200-day moving average near 110.27 yen, Ino said.

So far in April, the dollar has gained 2.8 percent against the yen, putting it on track for its biggest monthly gain since November 2016.

The yen’s recent weakness has probably been driven in part by Japanese investors increasing their exposure to foreign currencies at the start of Japan’s new financial year, said Sim Moh Siong, FX strategist for Bank of Singapore.

Still, the yen may see its near-term losses limited at around 110 per dollar, Sim said.

The Japanese currency likely holds attraction for overseas investors looking to diversify their currency allocations, given that the yen’s real effective exchange rate — its trade-weighted and inflation adjusted exchange rate — still appears relatively cheap on a longer-term basis, Sim said.

“Yen will be valuable as a diversifier,” he added. (Reporting by Masayuki Kitano Editing by Shri Navaratnam and Jacqueline Wong)

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