March 20, 2012 / 9:18 AM / 5 years ago

FOREX-Dollar rises as risk sours; Aussie hit

* Dollar rises broadly as equity markets fall

* Concerns over China as BHP Billiton sees iron ore demand flattening

* Recent rise in U.S. yields supports dollar but may be overdone

By Neal Armstrong

LONDON, March 20 (Reuters) - The dollar edged up against a basket of currencies on Tuesday, supported on safe-haven demand as risk sentiment soured, and making strong gains against the Australian dollar amid concerns that China's appetite for raw materials could be slowing.

The Aussie fell 0.8 percent on the day to $1.0528, coming under pressure after global miner BHP Billiton said it saw signs that growth in iron ore demand was flattening in China, Australia's single biggest export market.

Concerns that a slowdown in China could hit global growth pushed the dollar index up 0.2 percent at 79.659, moving towards its March high of 80.738, a break above which would take the greenback to its highest levels since Jan. 18.

"There's a stronger (U.S.) dollar move generally today with any hint that growth is slowing more than expected in China being negative for risk generally and the Australian and New Zealand dollars in particular," said Adam Cole, Global Head of FX Strategy at RBC Capital Markets.

The dollar's recent upsurge has been driven by improving U.S. data and a modest brightening of the U.S. Federal Reserve's economic outlook in its latest policy statement. That prompted investors to scale back expectations of further monetary easing in the near term, helping to spur a rise in U.S. Treasury yields.

The 10-year U.S. Treasury yield rose to as high as 2.392 percent on Monday, its highest level since late October.

The two-year Treasury yield finished Monday's U.S. trade at roughly 0.38 percent, not far from last week's high of 0.414 percent, the highest since late July.

"The recent dollar rally has been based on unrealistic expectations for U.S. rates and I don't think it is well founded, " said Cole.

"The market is priced for rate hikes much earlier than the FOMC has indicated," he added.

EURO/DOLLAR VULNERABLE

The euro eased 0.2 percent to $1.3211, slipping away from a one-week high near $1.3266 hit on Monday.

Market players remain mindful of the risk that the euro zone's sovereign debt crisis could flare up again, and fret that Portugal may eventually need to restructure its debt like Greece, but there have been some signs of stabilisation in the euro zone's bond markets this year.

For example, the yield spread of 10-year Italian government bonds over their German counterparts stood at 282 basis points on Tuesday, down from around 535 basis points on Jan. 9.

Investors eyed talks between Italy's government and unions on reforms seen key to turning around the euro zone's third largest economy.

Prime Minister Mario Monti's meeting on Tuesday with union bosses could make or break his brief tenure as head of a government struggling to pay down massive debts and find ways to revive an economy in which factory output has fallen sharply.

In the near term, the euro could be vulnerable against the dollar given the diverging outlooks for the U.S. and euro zone economies, said Rob Ryan, FX strategist for BNP Paribas in Singapore.

"The (euro's) downside is probably a little more vulnerable because of the continued improvement in the U.S. data," Ryan said.

Moves in the dollar versus the yen picked up in European trade after a quiet Asian session when Japanese financial markets were closed for a national holiday.

The dollar rose 0.4 percent to 83.73 yen, moving back towards an 11-month high of 84.187 hit on Thursday on trading platform EBS.

The yen hit a fresh four-month low versus the euro of 110.70 yen. The Japanese currency has suffered over the past month after the Bank of Japan's surprise monetary easing in mid-February.

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