Dollar heads for best fortnight vs. yen since 1988

[November 18, 2016]  By Jemima Kelly

LONDON (Reuters) - The dollar powered to its highest levels since 2003 against a basket of currencies on Friday, with Donald Trump’s victory in the U.S. presidential election helping to give the greenback its best fortnight against the yen in almost 30 years.

Further underpinning the dollar was a speech by Federal Reserve Chair Janet Yellen, who on Thursday provided a signal that U.S. interest rates would rise next month, in line with most market participants' expectations.

The greenback hit a six-month high against the yen of 110.925 <JPY=>. It has gained around 7 percent in the last two weeks against the Japanese currency, its strongest showing since January 1988 and its second-strongest performance in the era of floating exchange rates.

The dollar index, which measures the currency against a basket of six major rivals, hit 101.37 <.DXY>, its highest since early April 2003.

"What we're looking at is a broad shift of investment back to the U.S.," 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.

Cochinos added that political and economic worries in Europe, Britain and Japan were keeping investors away from those currencies, providing the dollar with another boost.

While Yellen did not explicitly say the Fed would take action at its Dec. 13-14 policy meeting, she told a Congressional committee that a rate hike was likely "relatively soon".

Thursday's U.S. data gave even more credence to December rate-hike bets, with housing starts marking a nine-year peak, weekly jobless claims falling to a 43-year low and consumer prices posting their biggest increase in six months.

Markets are now pricing in a more than 90 percent chance of a rate hike by the end of the year, according to CME FedWatch.

"The new U.S. policy mix suggests that more Fed hikes have to be priced," said Societe Generale currency strategist Olivier Korber in Paris.

Sheets of former U.S. President Abraham Lincoln on the five-dollar bill currency are fanned out at the Bureau of Engraving and Printing in Washington March 26, 2015. REUTERS/Gary Cameron

"With lasting policy uncertainty and potential protectionism, there are probably enough ingredients to consider the risk of massive new dollar appreciation. If the negative political surprises don't stop there and have a far more dramatic impact on Europe, the euro could fall much more."

The euro - which is facing a slew of political risks, including an Italian constitutional referendum next month and French and German elections next year - hit an 11-month low of $1.0582 <EUR=> before recovering to trade flat on the day at $1.0620.

The single currency is on track to record its weakest fortnightly performance against the dollar in 20 months.

China's yuan - which is on track for its biggest yearly falls since 1994 - hit a fresh eight-year low. [CNY/]

(Additional reporting by Tokyo markets team, editing by Larry King)

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