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FOREX-Dollar struggles as U.S. yields soften; Bitcoin soars

* Graphic: World FX rates tmsnrt.rs/2RBWI5E

LONDON, Feb 9 (Reuters) - The U.S. dollar was firmly pinned at a one-week low on Tuesday as an overnight slide in U.S. Treasury yields raised doubts on the outlook for the greenback against the backdrop of a looming U.S. fiscal stimulus package.

Investors have pushed up the dollar recently as Democrats moved to fast-track President Joe Biden’s $1.9 trillion COVID-19 relief package. But some analysts say massive fiscal spending coupled with continued ultra-easy Federal Reserve monetary policy will ultimately prove to be a dollar headwind.

“There has been an impressive pullback in U.S. Treasury yields overnight which is causing the broad-based dollar weakness before the bond auctions this week,” said Kenneth Broux, a strategist at Societe Generale in London.

In Monday’s trading, ten-year U.S. Treasury yields rose to near March 2020 highs as investors bet on a broader reflationary theme in the financial markets. But it has slipped back to 1.16%, down 4 bps from the overnight highs.

Tuesday raised familiar doubts among investors, with some traders saying the fresh fiscal stimulus along with record low U.S. interest rates will weigh on the currency in the coming months.

“Whereas until recently the prospect of fiscal support caused positive reactions on the markets, the market no longer seems to be entirely certain about that any longer,” Commerzbank strategists said.

The dollar index was 0.5% lower at 90.50 in London trading, its lowest level since Feb. 1.

Disappointing U.S. jobs data on Friday knocked the wind out of a two-week run that had lifted the dollar to a more than two-month high of 91.6.

BLISTERING BITCOIN

The biggest beneficiary of the weakening dollar was cryptocurrencies with bitcoin rocketing above $48,000, building on a nearly 20% surge overnight after Tesla Inc announced a $1.5 billion investment in the digital asset.

The yen was another major beneficiary of the weak dollar trend, with the Japanese unit rising 0.5% against the U.S. dollar to 104.69 yen.

The yen has become increasingly correlated with outright yields than an indicator of broad risk sentiment. A 90-day rolling correlation between yen and U.S. yields has strengthened considerably since the final quarter of 2020.

Elsewhere, the euro rose 0.5% to $1.2099 on Tuesday, up from a two-month low of $1.1952 touched Friday.

The British pound revisited its highs since May 2018, climbing to $1.3784 in Asia. It last traded up 0.3% at $1.3774.

Reporting by Saikat Chatterjee; Editing by Kirsten Donovan and Philippa Fletcher

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