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Oil slip sends dollar, bond yields skidding

[November 28, 2016] By Marc Jones

LONDON (Reuters) - The dollar saw its biggest drop in almost a month on Monday as a bashing for oil prices on doubts about an OPEC output cut this week left investors reversing "Trumpflation" trades that have gripped markets since the U.S. election.

Crude prices <LCOc1> and Europe's main stock markets <0#.INDEXE> were down over 1 percent in early European trading as Italian shares also took a fresh tumble ahead of its referendum on constitutional change this Sunday.

Oil's fall added to a 3.5 percent plunge on Friday when it emerged that Saudi Arabia would not join talks with non-OPEC producers on potential supply cuts.

With oil so vital for global costs it was rapidly cooling bets on a near-term inflation jump and tempering expectations for rises in U.S. interest rates that have been running up fast in recent weeks.

The dollar sank as much as 1.6 percent against the yen, going as low as 111.355 yen <JPY=> before recovering slightly to 112.00.

That was still its biggest fall against its Japanese rival since October 7 and against a basket of top world currencies <.DXY> it was the greenback's worst day since November.

"It's a bit of a pull back in the dollar," said Societe Generale strategist Alvin Tan. "The fall in oil is pushing back U.S. bond yields and that is leading the consolidation in the dollar.. there is more scepticism about an (OPEC) output cut now."

The moves hoisted the euro to an 11-day high $1.0686 <EUR=> as it got a lift too from the election of Francois Fillon as the center-right candidate in next year's French presidential election.

The reformist former prime minister is now favorite to become president, with a flash opinion poll showing he would easily beat National Front leader Marine Le Pen in a run-off second round. Markets worry the far-right Le Pen, who has promised a referendum on membership of the European Union if she wins, would threaten the future of the currency bloc.

Italy, which has been plagued by political concerns ahead of its referendum on constitutional reform, remained a more obvious concern meanwhile.

Having lost more than half their value over the last year, Italian banking stocks <.FTIT8300> fell 3 percent to their lowest in almost two months [.EU] as Italian government bonds also underperformed the wider rally in fixed income. [GVD/EUR]

Opinion polls now predict defeat for the government in what would be the third big anti-establishment revolt by voters this year in a major Western country, following Britain's unexpected vote to leave the European Union and the U.S. election of Donald Trump.

"Fears are that an Italian dissent and resulting market turmoil would dissuade already gutsy investors from daring to participate in desperately needed recapitalizations within a very troubled 4 trillion euro banking system," said Mike van Dulken, Head of Research at Accendo Markets.

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People are reflected in a display (top) showing the current exchange rate between U.S. dollar and Japanese Yen outside a brokerage in Tokyo, Japan, November 7, 2016. REUTERS/Kim Kyung-Hoon

HOT METALS

As the dollar wilted in the currency markets, gold <XAU=> bounced back to $1,192.0 per ounce from Friday's low $1,171.5, which was its lowest level since early February.

Industrial metals also remained red hot on hopes of strong demand for property and infrastructure investment in China and the United States.

Chinese steel futures <SRBcv1> jumped over 6 percent, while iron ore futures <DCIOcv1> also gained about six percent and zinc <CMZN3>, used to galvanize steel, powered to a nine-year high on the London Metal Exchange.

Asian shares <.MIAPJ0000PUS> rose 0.4 percent overnight, led by gains in Hong Kong <.HSI> and Taiwan <.TWII> though Japan's Nikkei <.N225>, which has been performing even better than a record high Wall Street in recent weeks thanks to the yen's fall, ended down 0.1 percent.

"It will be scary to think markets may fully reverse their moves since the elections, changing their mind that Trump's policy may not be so good after all," said Bart Wakabayashi, head of Hong Kong FX sales at State Street Global Markets.

In the bond markets, the yield on 10-year U.S. Treasuries <US10YT=RR> dropped almost 5 basis points to 2.323 percent, off its 16-month high of 2.417 percent touched last week. Europe's benchmark, German Bunds, saw their equivalent yield drop 3 basis points.

U.S. stock futures <ESc1> slipped 0.2 percent ahead of U.S. trading. Wall Street's four main indexes <.DJI> <.SPX> <.IXIC> <.RUT> all hit record highs last week, a feat last achieved in 1999.

(Editing by Janet Lawrence)

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