Dollar bulls are running scared as a global bond-market rout gains momentum in Europe.
The greenback weakened against most of its 16 major peers and snapped a three-day rise against the euro as debt from Germany to Italy and Spain tumbled. The surge in European yields that began last month has outpaced increases in the U.S., spurring appetite for euros.
"It's like a mini taper-tantrum out of the euro zone," Mark McCormick, a foreign-exchange strategist at Credit Agricole SA, said by phone. "The relative interest-rate spreads are driving short-term movements. You can see the euro has a stronger bid."
The dollar fell 0.8 percent against the euro to $1.1241. The euro rallied versus most of its 16 major peers, adding 0.6 percent to 134.79 yen. The greenback was little changed at 119.83 yen.
Bonds dropped on Tuesday amid what Goldman Sachs Group Inc. termed a "large and vicious" selloff in euro-area securities. Germany's 10-year yield increased seven basis points to 0.68 percent, Spain's rose eight basis points to 1.82 percent and yields on similar-maturity Italian debt added eight basis points to 1.84 percent.
"We've seen the dollar, which was one of the more popular long positions against the euro, come off on the back of some higher yields" in Europe, Brian Daingerfield, a currency strategist at Royal Bank of Scotland Group Plc's RBS Securities unit in Stamford, Connecticut, said by phone. A long position is a bet on an asset rising in value. "A continued selloff in European fixed income markets with higher rates could keep upward pressure on the euro."
The euro is forecast to resume its decline by year-end, as Europe maintains its unprecedented program of monetary stimulus while the U.S. moves toward raising rates for the first time since 2006. The currency will slip against 13 of its 16 major counterparts by Dec. 31, according to predictions.
Markets will be able to anticipate the first increase in U.S. interest rates by monitoring incoming data, which ought to "help mitigate the degree of market turbulence" when the Fed does move, New York Federal Reserve President William C. Dudley said on Tuesday. Any increase is likely to "signal a regime shift" that will stir financial markets when it occurs, he said.
U.S. retail sales data due Wednesday may offer clues on the timing of when the Fed will start to tighten policy. They'll show a 0.2 percent increase in April from the previous month, down from a 0.9 percent jump in March, according to the median estimate of economists.
"There is some ongoing uncertainty on when the first Fed interest-rate hike is going to come," said Neil Mellor, a currency strategist at Bank of New York Mellon Corp. in London. "But underneath it all is the simple fact the Fed is more likely than not going to be the first major central bank to start hiking rates, so the cap on the dollar is going to be fairly limited."