Dollar surges to 11-month high as bond rout persists

[November 14, 2016]  By Patrick Graham

LONDON (Reuters) - The dollar surged to an 11-month high against a basket of major currencies on Monday, resuming an upward track driven by U.S. bond yields and expectations for higher inflation after Donald Trump's U.S. election victory.

China’s yuan lost another third of a percent to fall to its weakest since before the launch of its offshore market in 2010, while the yen and the euro both sank by about another full percentage point to multi-month lows.

Friday had seen a halt in the bond sell-off that has been the clearest global reaction in markets to Trump's election, but U.S. 10-year yields rose by another 11 basis points on Monday.

"I think people were just pausing for breath," Rabobank strategist Jane Foley said.

"The rise higher in yields, coupled with the fact that people have been reducing dollar longs for most of this year, has really played into this. It is really setting the tone for all other markets."

The euro fell to $1.07285, its lowest since January, before steadying at $1.0766, still leaving it down 0.9 percent on the day. The dollar index <.DXY> rose 1 percent to 100.04, its highest since last December, before also easing back slightly.

At the heart of the moves are expectations that Trump's administration would both boost spending and put more restrictions on trade, both steps that could put an end to the low inflation which has dominated the past decade in the developed world.

The 10-year Treasury note yield <US10YT=RR> rose to a 10-month high of 2.3 percent in European trade.

The latest IMM report showed "long" bets on the dollar gaining had been rebuilt over the past month but they still remain about half the levels recorded during last year among asset managers and leveraged funds.

Analysts from one of the market's biggest dollar bulls in recent years, Deutsche Bank, said they now felt confident the dollar would reach their year-end target of $1.05 per euro.

"The dollar is approaching its sweet spot for a late-cycle rally," Deutsche strategist George Saravelos said. "When the dollar last broke out of such a prolonged range corporate hedgers and asset allocators were caught off guard and the euro moved 10 percent within the following few weeks."

U.S. dollar notes are seen in this November 7, 2016 picture illustration. Picture taken November 7. REUTERS/Dado Ruvic/Illustration

Investors are still struggling to grasp all the implications the new U.S. president may have for the world's economic balances. For the Bank of Japan, so far, it has eased one of the major headaches: the global pressure for a stronger yen.

Japanese third-quarter growth data also provided some encouragement, expanding for a third consecutive quarter at an annualized rate of 2.2 percent.

"Sharply higher U.S. yields are providing an initial boost for USD/JPY while concerns over more protectionist U.S. trade policies which would favor a stronger yen are judged as less important for now," MUFG currency analyst Lee Hardman said.

On China, for now, the market is choosing to simply bet on a falling yuan - without necessarily reading across to what that may mean for real prices, for instance, or for manufacturing goods and commodities or the chances of large dollar debt defaults by Chinese companies.

"There is the issue of too much debt in China," Rabobank's Foley said.

"And then there is the issue of too much debt being owned in China. Would one of the ways in which Beijing could retaliate (to U.S. protectionism) be to sell U.S. Treasuries? And what would that do to Trump's plans for taxes and spending? The market is choosing to ignore that just now."

(Editing by Louise Ireland)
 

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