The dollar surged to the highest since February on bets that Donald Trump’s administration will ramp up spending, boosting economic growth and inflation and pushing the Federal Reserve to raise interest rates. Two of the world’s biggest currency-trading banks see more gains ahead.
A gauge of the U.S. currency gained for a fourth day, building on its biggest weekly advance in five years, as the U.S. president-elect unveiled key administrative appointments in preparation for taking office in January. Thirty-year Treasury yields exceeded 3 percent for the first time since January, leaving them close to an 18-month high versus similar-maturity German yields.
After accumulating losses for most of 2016, the greenback is now up about 0.6 percent for the year. The strength runs counter to the consensus before the election -- that a Trump victory would spur a rout in the U.S. currency as investors anticipated financial-market volatility that might cause the Fed to delay rate increases. The focus turned instead to the potential for economic stimulus. For Deutsche Bank AG, the world’s fourth-biggest currency trader, a stronger dollar will help restrain inflation as growth picks up.
"There is likely to be some scope for U.S. dollar appreciation of at least another 5 percent," Alan Ruskin, global co-head of foreign-exchange research in New York at Deutsche Bank, wrote in a note to clients. "A strong U.S. dollar is potentially a vital disinflationary offset to likely reflationary fiscal policy enacted when the economy is already at full employment."
The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major peers, rose about 0.9 percent as of about 11 a.m. in New York, reaching the highest since February. The gauge surged 2.8 percent last week, the most since September 2011.
Trump’s Pledges
Trump’s pledges include spending from about $500 billion to $1 trillion over a decade on roads, bridges and airports. He said in his victory speech that he aims to make America’s infrastructure “second to none” while putting millions of people to work and doubling economic growth.
The dollar is "likely to go up," Steven Englander, global head of Group-of-10 currency strategy in New York at Citigroup Inc., the world’s biggest foreign-exchange trader, said in an interview with Bloomberg Television. Investors are signaling that with expected fiscal stimulus, "long inflation, long rates and long dollar is the only trade in town."
While currencies of higher-yielding countries fared best, the yen dropped to a five-month low against the dollar. Japan’s stronger-than-forecast third-quarter economic growth added to speculation that global expansion will pick up, damping demand for the yen as a haven.
Yen Punished
The yen depreciated 1.6 percent to about 108.40 per dollar and reached the weakest level since June.
“The dollar may continue to rally against the yen toward the middle of the 108 level given expectations for Trump’s economic policy,” said Kenji Yoshii, a foreign-exchange strategist at Mizuho Securities in Tokyo. The rally may pause around the time of the Fed’s December meeting as investors look for clues for future policy, he said.
The euro fell 1.2 percent to $1.0721, touching its lowest level in a year. Trump’s unexpected victory is clouding growth prospects in the euro zone, together with the looming exit of the U.K. from the European Union, Jens Weidmann, a member of the European Central Bank’s governing council, said in Berlin last week.
There will be a referendum in Italy and elections in France, the Netherlands and Germany in the next 12 months. Support for populist parties in Europe is rising.
Traders see a 92 percent chance the Fed will increase rates at its December meeting, up from 80 percent a week ago, according to data compiled by Bloomberg based on fed fund futures. Higher rates tend to support a currency by boosting demand.
“The Fed will need to hike rates in 2017 by more than we originally thought likely a couple of weeks ago,” said Mark Dowding, London-based partner and money manager at BlueBay Asset Management LLP, which oversees about $60 billion.
--With assistance from Yumi Ikeda Daisuke Sakai Lilian Karunungan and Chikako Mogi To contact the reporters on this story: Susanne Barton in New York at swalker33@bloomberg.net, Anchalee Worrachate in London at aworrachate@bloomberg.net. To contact the editors responsible for this story: Boris Korby at bkorby1@bloomberg.net, Mark Tannenbaum
©2016 Bloomberg L.P.
