LONDON (Reuters) – The euro was stuck near two-week lows on Thursday and the dollar drifted away from recent highs as sliding government bond yields pressured both currencies.

The global bond rally has accelerated this week on expectations of more monetary easing from central banks, although the impact on foreign exchange markets has been limited, with overall volatility remaining low.

Markets were closed in the United States on Thursday for its Independence Day.

Adam Cole, an FX strategist at RBC Capital Markets, said that while the big drop in U.S. Treasury yields was negative for the dollar, the outright yield advantage that the United States enjoyed over other countries was supporting demand for the greenback and minimizing the spillover into higher volatility.

“The dollar isn’t falling much compared to how much U.S. yields are coming down. It’s explained by the level of yields rather than the rate of change,” he said.

The euro traded slightly higher at $1.1286 EUR=EBS. It has weakened since IMF Managing Director Christine Lagarde, perceived as a policy dove, was nominated as the next European Central Bank president.

The dollar index was marginally lower at 96.734 .DXY.

The dollar has weakened in recent weeks as expectations build for a Federal Reserve rate cut later this month, although the index is off three-month lows of 95.843 plumbed in June.

TRADE TENSIONS

Waning expectations for a quick resolution of the U.S.-China trade row have also hurt sentiment towards the dollar.

Adding to a sense of unease about trade talks, U.S. President Donald Trump on Wednesday repeated his view that China and the euro zone are manipulating their currencies.

But the dollar remains the dominant reserve currency. International Monetary Fund data released recently showed the dollar constituted 58% of global foreign exchange reserves in the first quarter of 2019, up marginally from the previous quarter and far above the euro’s 19% share.

The focus now shifts to U.S. non-farm payrolls data due on Friday, which economists expect to have risen by 160,000 in June, compared with a rise of 75,000 in May.

Some analysts think the dollar will hold its own in the coming months, although the Japanese yen could act as a decent hedge should the rally in global stocks come to an end.

“JPY strength is one area of the FX space which we think will be a net drag on the value of the USD over the coming 3-6M, despite the fact that the USD should continue to hold up well vs the EUR and the RMB (Chinese renminbi),” said Stephen Gallo, a strategist at BMO Capital Markets.

The yen was up slightly at 107.78 yen per dollar JPY=EBS, above five-month lows of 106.78 yen touched in June.

The Aussie was down 0.1% to $0.7022 AUD=D3 after earlier hitting a two-month high.

Sterling changed hands at $1.2575 GBP=D3, near two-week lows hit on Wednesday after investors raised their bets that the Bank of England would follow other central banks and ease policy.

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