Dollar holds firm as investors seek safety from rout in equity markets

TOKYO (Reuters) - The dollar stood tall on Tuesday as a rout in global equities prompted anxious investors to seek shelter in the relative safety of the greenback, with peers like the euro on the defensive.

The euro was steady at $1.2371 (EUR=) after shedding 0.7 percent overnight to pull further away from a three-year high of $1.2538 set late in January.

The dollar index against a basket of six major currencies (DXY) stood at 89.628. It rose to an 11-day high of 89.699 the previous session, when it advanced 0.5 percent.

The greenback was firmly on the back foot as recently as late January, when the dollar index fell to a three-year trough of 88.438, hurt by a range of factors including concerns about U.S. trade protectionism and perceptions of narrowing yield advantage.

It caught a break, however, lifted by Friday's robust U.S. employment report and the punishing sell-off in the recently bullish global equity markets.

"We are seeing a big rewinding of positions that had been built up since the start of the year, such as euro longs," said Masafumi Yamamoto, chief forex strategist at Mizuho Securities in Tokyo.

"The stock market plunge caused by the jump in yields has been the trigger. Investors hurting from the drop in equities are seen trying to limit their losses by selling recently bullish currencies like the euro, which in turn supports the dollar."

The dollar also tends to benefit from its perceived safe-haven status at times of market ructions.

The Dow (DJI), which rose to a record high late in January, fell 2.5 percent on Friday and plunged 4.6 percent on Monday.

The sharp pullback comes amid concerns about higher inflation, sending U.S. bond yields surging to a four-year top on Monday.

Friday's U.S. jobs report was the latest jolt to financial markets, as strong wages growth reinforced the inflation and monetary tightening speculation, with traders betting the Federal Reserve might raise rates at a faster pace than expected this year.

The pound touched a two-week low of $1.3937 after dropping more than 1 percent overnight. Sterling hit a 1-1/2-year high of $1.4346 late last month.

The Australian dollar was little changed at $0.7880 following a loss of 0.5 percent on Tuesday. The Aussie had advanced to over a 2-1/2-year top at $0.8136 on Jan. 26.

The dollar advanced against most of its counterparts with the exception of the yen, which is the perennial safe-haven bet during times of risk aversion.

The greenback was steady at 109.130 yen after dropping 1 percent overnight, dragged lower as U.S. Treasury yields fell from four-year highs on Monday after the rapid selloff in equity markets sparked demand for the low risk debt.