The Australian dollar and other riskier currencies recovered some lost ground against the U.S. dollar on Monday, after suffering their biggest plunges in a year at the end of last week amid a hefty sell-off in global bond markets.
The greenback weakened broadly early in Asia trade, but barely enough to trim its biggest surge since June from Friday.
Currency markets have taken cues from the global bond market, where yields have surged in anticipation of an accelerated economic recovery.
The aggressive bond selling implies a bet that global central bankers will need to tighten policy much earlier than they have so far been forecasting.
Equities and commodities have also sold off as the debt rout unsettles investors.
“USD direction is likely to hinge on not only the direction, but also the pace, of global bond moves,” Commonwealth Bank of Australia strategists wrote in a research note.
Bond moves are trumping economic data as the driver of foreign-exchange markets, with yields moving “well in advance” of economic fundamentals, they said.
“The risk is tilted to a firmer USD this week because we doubt central banks will intervene in any meaningful way yet.”
The Aussie jumped 0.6% to $0.7754 early in the Asian session on Monday, following a 2.1% plunge on Friday.
The New Zealand dollar strengthened 0.6% to $0.7270, recovering some of Friday’s 1.9% slide.
The euro gained 0.2% to $1.20910, after dropping 0.9% at the end of last week, the most since April.
The dollar slipped 0.1% to 106.415 yen , but still near the six-month high of 106.69 touched Friday.
Federal Reserve Chair Jerome Powell, who last week repeated the U.S. central bank will look through any near-term inflation spike and tighten policy only when the economy is clearly improving, will speak on the economy this Friday, the same day as the usually closely watched monthly payrolls data is due.
The Reserve Bank of Australia will hold its monthly policy meeting on Tuesday, and markets are widely expecting it to reinforce its forward guidance for three more years of near-zero rates, while also addressing the market dislocation.
Reporting by Kevin Buckland; Editing by Lincoln Feast.