London - Currency markets swung back to bets on improving growth and tighter monetary policy on Tuesday, lifting the dollar and euro against traditional safe havens for capital including the yen and the Swiss franc.
Emmanuel Macron's election as French president on Sunday turned attention away from the political concerns on both sides of the Atlantic that have dominated currency markets this year, and US and European yields were broadly higher in morning trade.
The interest rate premium investors get for holding dollar 10-year government bonds instead of their yen equivalents rose to its highest since the end of March overnight and German Bund yields were also higher.
"We are going back to trading diverging monetary policy," said Athanasios Vamvakidis, head of G10 currency strategy at Bank of America Merrill Lynch in London.
"The market has priced in a 75 to 80 percent chance of a U.S. rate hike in June. At the same time the market expects that the (European Central Bank) will start tapering later this year. So both the euro and dollar should do well against the yen."
The dollar gained half a percent to 113.80 yen and the euro around a quarter of a percent to 123.99 yen.
The Swiss franc, another currency with firmly negative interest rates as well as a central bank actively seeking to weaken it with market intervention, fell to its lowest against the euro since mid-October. It is down just over 2 percent against the euro in the past fortnight, compared to an almost 3 percent fall in the dollar.
Market measures of volatility for euro-dollar rates have reached their lowest for three years in the past week and Deutsche Bank strategist Oliver Harvey warned in a note on Tuesday of the risks of a turn in that trend.
"One of the main themes this year has been the fall in volume but there are increasing signs a turning point is close," he said, pointing both to the risks of more downbeat signals on global growth and the chances of the Fed outpacing expectations on future policy moves.
With the pricing for a US Federal Reserve rate rise in June about as firm as markets tend to get ahead of the event itself, it was a bounce for the dollar that dominated morning trade in Europe.
The euro dipped back below $1.09, down more than a cent down from 6-month highs hit after Macron's victory on Sunday.
The Australian dollar sank more than half a percent after another batch of soft retail sales numbers pointed to more weakness in a domestic economy struggling to find a solid basis for growth.
"From here you have to balance two competing factors: the outlook in Europe looks good and that is encouraging investors who had held off previously to buy European equities on an unhedged basis," said Roger Hallam, Chief Investment Officer for currencies at JP Morgan Asset Management in London.
"The flip side is that relative yield developments do not point to a stronger euro (against the dollar). It actually looks expensive here."
Still, the euro zone's GDP growth in the first quarter, due next week, is expected to have outpaced anaemic 0.7 percent growth in the United States in the same period. Inflation jumped back to 1.9 percent in April.
ECB board member Yves Mersch said on Monday that the central bank is close to replacing its negative view with a neutral one on whether the euro zone economy will reach growth targets, and should adjust its policy guidance accordingly.
ECB chief Mario Draghi is due to speak to the Dutch parliament on Wednesday.