Trumped-up dollar steadies, offshore yuan hits record low

[November 23, 2016]  By Jemima Kelly

LONDON (Reuters) - The dollar steadied near a recent peak on Wednesday, taking a breather ahead of the U.S. Thanksgiving holiday after surging on expectations that a Donald Trump administration will boost growth and inflation, pushing up U.S. interest rates.

The dollar index <.DXY> - which tracks the greenback against six major currencies - has climbed over 3 percent since Trump's victory two weeks ago, but has edged slightly lower this week after reaching its highest levels since early 2003.

Investors are betting the dollar will be strengthened by Trump's plans for fiscal stimulus -- which may drive the Federal Reserve to raise interest rates faster than had been anticipated because of increased inflation -- and for infrastructure spending and the repatriation of profits earned overseas.

China's offshore yuan fell 0.4 percent on the day to a record low of 6.9378 per dollar <CNH=D3> as traders grappled with the strengthening U.S. currency and signs of accelerating capital outflows in the wake of Trump's shock election win. [CNY/]

"I still think that's more of a dollar move, and they (the Chinese authorities) are allowing that to be reflected more than anything else, but it's important for them to try to ensure things are under control," said UBS Wealth Management currency strategist Geoffrey Yu.

Yu added that investors would be reluctant to take short positions on the dollar ahead of the release minutes from the U.S. Federal Reserve's November policy meeting, due later in the day. Markets are now pricing in around a 95 percent chance of a December Fed hike, according to CME FedWatch.

"I don't think people are ready to turn around on the dollar yet," he said.

The dollar was flat on Wednesday against both the euro and yen ahead of Thursday's Thanksgiving holiday, having surged to multi-month highs against both currencies in recent weeks.

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

"The dollar is taking a pause but with good reason – the U.S. is on holiday tomorrow and it's going to be a very light day the day afterwards," said Citi's head of G10 currency strategy in London, Richard Cochinos.

"Investors will probably end up coming back on Monday to refocus not so much on the dollar and the U.S. story but more what are their expectations for Europe going forward."

The euro is facing a host of political risks in the coming months - from an Italian constitutional referendum in less than two weeks to French and German elections next year - that are seen as likely to drive the euro lower.

The single currency traded at $1.0631 on Wednesday, close to an 11-month low of $1.0569 hit last week.

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