By John McCrank

NEW YORK Reuters) – The U.S. dollar hit a 3-1/2-month high against a basket of currencies on Monday on expectations of strong U.S. economic growth and rising inflation, which also sent Treasury yields higher, boosting the greenback’s safe-haven appeal.

After falling 4% in the last quarter of 2020, the dollar has strengthened nearly 2.5% year-to-date as investors expect the broad rise in U.S. bond yields to weigh on frothy equity valuations and drive demand for the U.S. currency.

“If we continue to see yields rise, that’s going to be very dollar positive and there’s nothing really getting in the way,” said Edward Moya, senior market analyst at OANDA in New York.

Strong U.S. jobs numbers and the Senate’s approval of President Joe Biden’s $1.9 trillion recovery package also bolstered the dollar.

“The U.S. labor market is healing quickly, President Biden’s gargantuan relief package has been approved by the Senate, and America has stepped up its immunization game, administering a record number of vaccines this weekend,” said Marios Hadjikyriacos, an investment analyst at XM.

U.S. Commerce Secretary Gina Raimondo on Monday said a strong dollar was “good for America” and rejected calls for a weakening of the greenback.

U.S. Treasury yields were within striking distance of a one-year high above 1.62% hit on Friday, contrasting with German yields, which dipped nearly 5 basis points last week, pulling the euro to a near four-month low below $1.19.

The dollar index was up 0.53% at 92.38 against a basket of six major currencies, its highest level since Nov. 24.

MSCI’s emerging market currency index lost as much as 0.8% for its biggest daily drop since the pandemic roiled markets in March 2020. The index slipped to a three-month low of just under 1,700 points.

With the volatility in foreign exchange, Consumer Price Index data out on Wednesday and Producer Price Index data due Friday will be closely watched, as will 10-year and 30-year U.S. Treasury auctions on Wednesday and Friday, respectively.

“For the first time in more than a decade, inflation numbers and Treasury auctions are going to start to matter,” said Boris Schlossberg, managing director of FX strategy at BK Asset Management.

“If the data is not as jacked-up as the market thinks it will be, then I think we’ll probably have a bit of a dollar pullback,” he said.

The dollar held at a nine-month high against the yen, at 108.875 yen, and was near a one-month high versus the British pound, at $1.3839.

(Graphic for USD positions: https://fingfx.thomsonreuters.com/gfx/mkt/qmypmwdgzpr/USD%20positions.JPG)

(Reporting by John McCrank in New York; additional reporting by Saikat Chatterjee in London; Editing by Alexander Smith and Nick Zieminski)