(Adds comment, fresh prices; changes byline, dateline from LONDON)
The dollar strengthened and the euro weakened in sideways trade on Tuesday after European Central Bank President Christine Lagarde strived to keep expectations of rising interest rate hikes at bay that has sent bond markets into a tizzy.
A hawkish tone from both the ECB and the U.S. Federal Reserve last week surprised markets and sent yields on euro zone and U.S. debt spiking higher.
The currency market has broadly traded little changed as traders and investors wait for U.S. consumer price data on Thursday.
The dollar index =USD rose 0.217%, with the euro EUR= down 0.23% to $1.1416.
"It's all about what's going on in the debt market," said Marc Chandler, chief market strategist at Bannockburn Global Forex. "For the second day in a row the two-year German yield is softer, and that stops a nine-day increase. It had to do with Lagarde's pushback yesterday."
The German two-year bund DE2YT=RR surged to -2.54% on Friday, up from -0.654 on Jan. 25, while the 10-year U.S. Treasury benchmark US10YTRR topped 1.97% on Tuesday, a jump from about 1.73% over the same period.
Bond concerns were particularly acute for the so-called peripheral economies in Europe where inflation-adjusted Italian yields IT10YIL=RR are just a shade from popping into positive territory.
Lagarde struck a more cautious tone, saying high inflation is unlikely to get entrenched and ECB council member Pablo Hernandez de Cos on Tuesday said any central bank move "has to be gradual".
"Can the euro go higher if periphery spreads blow out and if Italian 10-year real yields turn positive, can the economy cope with that," said Kenneth Broux, a strategist at Societe Generale in London. "That is the million dollar question investors are asking."
Investors were also looking carefully at the future trajectory of interest rates between the United States and Europe.
Investors are well aware that policy rates are set to climb much more in the United States than in the eurozone in coming months, Unicredit strategists said.
The Japanese yen weakened 0.39% versus the greenback at 115.58 per dollar, while sterling GBP= was last trading at $1.3549, up 0.11% on the day.
While money markets were pricing in as much as 134 bps in cumulative rate hikes from the Fed over the remainder of 2022, analysts were expecting 50 bps in hikes from the ECB over that period.
Still, the short-term outlook has tilted in favor of the single currency, with the widely watched bond yield spread between U.S. and German 10-year debt narrowing in late January to around 170 bps from an April high of 194 bps.
On Monday, bitcoin and the Australian dollar had posted gains as equity markets rallied in Europe, but the latter was a bit softer on Tuesday as a cautious mood prevailed in Asia. The Aussie AUD=D3 was broadly flat at $0.7120. AUD/
Bitcoin BTC=BTSP punched through its 50-day average to top $44,000 for the first time in nearly a month on Monday and held there in Asia for a gain of more than 17% in four sessions.
Bitcoin BTC= last fell 1.47% to $43,457.00.
======================================================== Currency bid prices at 10:55AM (1555 GMT)Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid Previous Change Session Dollar index =USD 95.6100 95.4100 +0.22% -0.055% +95.7540 +95.3960 Euro/Dollar EUR=EBS $1.1418 $1.1442 -0.21% +0.44% +$1.1448 +$1.1397 Dollar/Yen JPY=EBS 115.5900 115.0900 +0.44% +0.41% +115.5900 +115.0600 Euro/Yen EURJPY= 131.98 131.68 +0.23% +1.27% +132.0000 +131.4900 Dollar/Swiss CHF=EBS 0.9246 0.9235 +0.11% +1.36% +0.9263 +0.9226 Sterling/Dollar GBP=D3 $1.3550 $1.3535 +0.12% +0.20% +$1.3563 +$1.3509 Dollar/Canadian CAD=D3 1.2710 1.2667 +0.34% +0.53% +1.2721 +1.2666 Aussie/Dollar AUD=D3 $0.7126 $0.7126 +0.00% -1.97% +$0.7138 +$0.7107 Euro/Swiss EURCHF= 1.0556 1.0566 -0.09% +1.80% +1.0572 +1.0530 Euro/Sterling EURGBP= 0.8424 0.8450 -0.31% +0.29% +0.8457 +0.8413 NZ Dollar/Dollar NZD=D3 $0.6634 $0.6635 +0.01% -3.06% +$0.6654 +$0.6629 Dollar/Norway NOK=D3 8.8300 8.7930 +0.42% +0.23% +8.8450 +8.7730 Euro/Norway EURNOK= 10.0834 10.0391 +0.44% +0.70% +10.0876 +10.0042 Dollar/Sweden SEK= 9.1671 9.1199 +0.29% +1.65% +9.1785 +9.1192 Euro/Sweden EURSEK= 10.4662 10.4363 +0.29% +2.27% +10.4692 +10.4008 <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ World FX rates https://tmsnrt.rs/2RBWI5E^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
