Dollar at three-and-a-half month high on elevated yields, euro soft after ECB

By Hideyuki Sano

TOKYO (Reuters) - The dollar held near a 3-1/2-month high against a basket of currencies on Friday as higher U.S. yields have prompted unwinding of big short positions in the currency while the euro was hampered by a dovish tone from the European Central Bank.

The dollar's index against six major currencies (DXY) hit a high of 91.639, its strongest level since mid-January as investors have warmed to the greenback thanks to attractive Treasury yields.

The benchmark 10-year U.S. Treasuries (US10YT=RR) had hit the psychologically important three percent mark on combination of worries about inflation and increased debt supplies as a result of President Donald Trump's tax cuts and spending plans.

Earlier this year, the correlation between U.S. yields and the dollar broken down as investors focused more on trade frictions and geopolitical issues, with currencies largely driven by Trump's tweets than by economic data and yields.

But so far this week, as concerns over U.S.-China trade tensions have ebbed somewhat, the markets have turned their attention to interest rate plays.

In addition, speculators' net dollar short position in currency futures in Chicago , a closely-watched indicator on market positioning, had hit a 6-1/2-year high, suggesting some short-covering will be due.

"There is an element of positioning unwind underpinning the recent dollar strength... The currencies that had the largest net long positions against the dollar are the ones that have declined the most," wrote analysts at ANZ wrote.

The euro, in which speculators had a record long position, fell to $1.20965 (EUR=) in the previous session, its lowest level since Jan. 12. It last stood at $1.21805, and is down 1.5 percent on the week.

The common currency slid on Thursday after ECB chief Mario Draghi acknowledged evidence of a "pull-back" from exceptional growth readings seen around the turn of the year, although the central bank sought to bolster expectations for a gradual withdrawal of its monetary stimulus.

The dollar changed hands at 109.33 yen , having risen to a 2-1/2-month high of 109.49 yen earlier in the week. So far this week, it has gained 1.5 percent.

The yen's weakness is likely to reflect expectations of yen-selling as drugmaker Takeda Pharmaceutical (T:4502) is pushing to buy London-listed Shire (L:SHP) in a $64 billion deal, which would be the biggest Japanese acquisition of a foreign company.

"Given the May 8 deadline of the deal, you would need to be really courageous to go long on the yen until then," said Yukio Ishizuki, senior strategist at Daiwa Securities.

In contrast, the pound has been relatively well-supported . It last stood at $1.3915 , down 0.6 percent so far this week.

Against the yen, it was fetching 152.14 yen (GBPJPY=), up 0.9 percent this week.

Elsewhere, the Australian dollar hit a 4-1/2-month low of $0.75465.

The Swedish crown weakened, hitting its lowest level since November 2009 against the euro (EURSEK=), after the Swedish central bank Riksbank pushed back its rate hike plan due to worries about sluggish inflation.