Dollar charges to 14-year high, bonds in full swing

Solid US data, Yellen comments fuel rate-hike bets

LONDON: The dollar scaled to its highest level in almost 14 years against a basket of currencies yesterday, while US bond yields were set for the biggest fortnightly rise in 15 years on bets US inflation and interest rates are headed higher. A growing perception that the economic policies of US President-elect Donald Trump will push up consumer prices helped put the dollar on track for its biggest two-week rise against the Japanese yen in almost 30 years. European shares nudged lower in early European trade , while Italian bonds bore the brunt of selling in regional debt markets, with borrowing costs set for their biggest two-week rise since the 2012 eurozone debt crisis.

In Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan slipped 0.4 percent to hover just above four-month lows touched earlier in the week. It looked set to log its fourth straight week of losses. The dollar’s rise against the yen raised hopes of an earnings boost to Japanese exporters, lifting Japan’s Nikkei average to a 10-month high. The blue-chip stock index closed 0.6 percent higher. Data on Thursday suggesting the US jobs market is tightening and inflation is gaining traction have bolstered a view that US growth and inflation could accelerate if the Trump administration cuts taxes and increases fiscal spending.

Last week’s unexpected US election result has prompted investors to ditch their once rock-solid conviction that growth in developed economies will remain tepid because of tough competition from emerging market economies with lower wages. That has led to a repricing of assets, witnessed most notably in currency and bond markets. “What we’re looking at is a broad shift of investment back to the US,” said Richard Cochinos, Citi’s head of G10 currency strategy in London. “There are expectations for tax cuts next year - which were part of the Trump campaign’s promises and then there’s also the idea of what type of fiscal boost are you going to have. That’s what’s driving asset prices it’s people’s expectations for the fiscal impulse next year,” he said.

BONDS RUMBLED

The 10-year US Treasury yield rose to 2.34 percent, its highest since December. It is up about 55 basis points over the last two weeks-the biggest fortnightly rise in 15 years and the second biggest in almost 30 years. In Europe, Italian 10year bond yields rose 8 basis points to 2.12 percent, racking up 44 bps over the last fortnight in its biggest surge since May 2012. Italy has been at the sharp end of the rout as investors fret about the political repercussions of a referendum next month that could further destabilize a country battling a banking crisis and a weak economy. Rising bond yields across the globe also reflect a reassessment of the Federal Reserve’s policy path down the road, beyond a likely rate hike in December.