By Saikat Chatterjee

LONDON (Reuters) – The dollar steadied on Tuesday after posting its biggest drop in three weeks during the previous session as investors consolidated positions following a recent rally.

The dollar has risen this year, along with Treasury yields, as investors bet the United States would recover faster from the pandemic than other developed nations, amid massive stimulus and aggressive vaccinations. At 2.5%, March’s was the biggest monthly gain for the dollar since the end of 2016.

But April got off to a weak start for the dollar as hedge funds cut their long positions, despite Friday’s stronger-than-expected monthly payrolls data.

The dollar index sank as low as 92.527 in Asia, its weakest since March 25. The U-turn comes less than a week after it hit an almost five-month top at 93.439.

In early London trading, the dollar advanced 0.14% to 92.70. On Monday, it fell 0.43%, its biggest single-day drop since March. 17, according to Refinitiv data.

Commerzbank strategists said the latest weakness in the dollar is a sign that the U.S. reflationary advantage versus other major economies is running out of steam and more evidence is required for the dollar to rise higher.

Benchmark 10-year Treasury yields extended their retreat on Tuesday, dipping below 1.7% early in early London trading from a peak of 1.776% last week – a level not seen since January of last year.

“The USD level has now outstripped the pickup in non-U.S. growth expectations,” meaning “there’s room for a USD pause” in its recent uptrend, Mark McCormick, the global head of foreign-exchange strategy at TD Securities, wrote in a client note.

The pause in the dollar’s drop also undercut the euro’s advances. It struggled to hold above $1.18, with pandemic-linked activity casting a shadow over the near-term economic outlook.

Elsewhere, the Australian dollar, considered a proxy for risk appetite, slipped to $0.76415 on Tuesday, after rallying 0.8% to start the week. The Reserve Bank of Australia left policy unchanged on Tuesday, as expected.

The cryptocurrency market capitalization reached a peak of $2 trillion on Monday, according to data and market trackers CoinGecko and Blockfolio. Gains over recent months attracted demand from both institutional and retail investors.

(Reporting by Saikat Chatterjee; additional reporting by Kevin Buckland in Tokyo; editing by Larry King)