LDN - Business

Dollar hits two-week high after U.S.-Japan meeting

[February 13, 2017] By Patrick Graham

LONDON (Reuters) - The dollar hit a two-week high against the yen with another round of solid gains on Monday as investors focused again on the U.S. reflation trade which dominated the aftermath of Donald Trump's election in November but has stalled this year.

All eyes are fixed on testimony by Federal Reserve chief Janet Yellen this week after signs that other policymakers at the U.S. central bank are leaning towards more hikes in interest rates than the two currently priced in by markets.

That would help the dollar and reports that Trump did not even discuss the currency or its strength at weekend talks with Japanese premier Shinzo Abe did likewise.

The new president drove the greenback to its strongest gain since mid-December last week by promising a "phenomenal" tax reform for U.S. companies. Investors hope that signals the focus of day to day commentary is shifting away from trade protectionism and security, and towards economic growth.

"Is Trumpflation back with a vengeance? Probably investors will want to wait but it does seem that all of the cards for another bull run for the dollar may be falling back into place," said Viraj Patel, a strategist with Dutch bank ING in London.

"There can only be upside risk going into Yellen's testimony this week."

The dollar was up 0.4 percent at 113.63 yen in early deals in London <JPY=>, having reached as high as 114.17 yen in Asian trading. It was marginally lower against the euro at $1.0654 <EUR=> and around a third of a percent lower at $1.2525 to sterling. <GBP=>

Yellen will testify in Congress on Tuesday and Wednesday after giving markets little new to go on when the bank upgraded its inflation views earlier this month.

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A U.S. one-hundred dollar bill (C) and Japanese 10,000 yen notes are spread in Tokyo, in this February 28, 2013 picture illustration. REUTERS/Shohei Miyano

"Trump has just taken a positive approach to tax reforms and infrastructure spending," said Koji Fukaya, president at FPG Securities.

"It remains to be seen if this has any impact on Yellen, as the Trump administration's lack of policy clarity seemed like a factor that made the Fed hesitant to raise rates."

China's yuan was also a mover overnight, weakening in the face of the dollar's strength at the end of last week to hit its lowest in a month.

The yuan is widely expected to fall further this year and a further bleed of Beijing's FX reserves last week again has analysts debating whether a more dramatic weakening is on the cards at some stage.

It traded 0.2 percent weaker at 6.8771 at 0845 GMT.

(Additional reporting by Shinichi Saoshiro; Editing by Keith Weir)

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