Dol­lar takes breather, in­vestors anx­ious about Fed rate out­look Russian rou­ble big­gest win­ner from Trump vic­tory

Kuwait Times - - BUSINESS -

The dol­lar took a breather yes­ter­day as in­vestors waited to see if the US Fed­eral Re­serve will sig­nal any ac­cel­er­a­tion in the pace of fu­ture rate in­creases to deal with an ex­pected ram­pup in fis­cal spend­ing un­der Pres­i­dent-elect Don­ald Trump. In its pol­icy meet­ing end­ing later in the day, the Fed­eral Open Mar­ket Com­mit­tee (FOMC) is seen as all but cer­tain to raise its in­ter­est rate tar­get by 0.25 per­cent­age point to 0.50-0.75 per­cent. The de­ci­sion will be an­nounced at 1900 GMT.

It would be just the Fed’s sec­ond rate hike since the fi­nan­cial cri­sis in 2007-08, fol­low­ing last De­cem­ber’s tight­en­ing. “The mar­kets think a rate hike is a cer­tainty so the fo­cus is on the out­look for next year. I think they will main­tain their pre­vi­ous pro­jec­tions to raise rates twice next year but if they turn more hawk­ish, the dol­lar will test its up­side again,” said Shinichiro Kadota, chief FX strate­gist at Bar­clays.

The dol­lar in­dex, which tracks the US unit against a bas­ket of six ma­jor cur­ren­cies, edged down to 101.00, hav­ing slipped from this week’s high of 101.78 touched early on Mon­day. The euro inched higher to $1.0637, pulling fur­ther away from Mon­day’s one-week low of $1.0525.

Against the yen, the dol­lar was slightly higher at 115.25 yen, but re­mained well be­low Mon­day’s 10-month peak of 116.12 yen. Some in­vestors were ea­ger to take prof­its from the dol­lar’s mas­sive rally of about 10 per­cent against the yen since the Nov 8 US elec­tion.

Ex­pec­ta­tions that Trump will cut taxes, boost fis­cal spend­ing and raise US growth over the near-term lifted US bond yields and stock prices, mak­ing the dol­lar more at­trac­tive. On Mon­day, the bench­mark US 10-year yield touched more than two-year highs above 2.50 per­cent, and the 30-year US Trea­sury yield climbed to around a 17-month peak. “If Trea­sury yields could cor­rect lower af­ter the FOMC out­come, that means the yen could ap­pre­ci­ate again,” said Yu­taka Miura, a se­nior tech­ni­cal an­a­lyst at Mizuho Se­cu­ri­ties. “Un­til then, the pair is range-bound in the 115-level,” he said.

Al­though many in­vestors had long thought the Fed will raise rates very slowly and cau­tiously, es­pe­cially un­der dovish Chair Janet Yellen, Trump’s surprise elec­tion vic­tory last month has dras­ti­cally shaken up that as­sump­tion. The two- year US debt yield rose to a 6 1/2-year high on Tues­day, and US money mar­ket fu­tures are pric­ing in al­most two rate hikes next year. That marks a sea change from be­fore the elec­tion, when mar­kets were not fully pric­ing in even one rate hike in 2017. Com­mod­ity-linked cur­ren­cies were sup­ported by strong rises in oil prices af­ter OPEC and some of its ri­vals reached their first deal since 2001 to jointly re­duce out­put to tackle global over­sup­ply.

The Aus­tralian dol­lar traded at $0.7489, hav­ing hit a near one-month high of $0.7524 on Tues­day. The Aussie was also not far from its March peak of 86.66 yen , a break of which could open a way for a test of above 90 yen touched last year. The Cana­dian dol­lar stood at C$1.3133 per US dol­lar, af­ter hav­ing risen to as high as C$1.3102 to the dol­lar on Tues­day, an eight-week high. The big­gest win­ner in the past few ses­sions from ral­ly­ing oil prices was the Russian rou­ble, which rose 5.4 per­cent over the past week against the dol­lar to hit a 16-1/2-month high. The Russian cur­rency is the best per­form­ing cur­rency since Trump’s upset. —Reuters

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