By Jamie McGeever
LONDON (Reuters) – The dollar hit a 14-year high against a basket of currencies on Wednesday as a post-U.S. election sell-off resumed across global bond markets, lifting Treasury yields and attracting investors to the U.S. currency.
That halted stocks in their tracks, with Europe’s main indices down as much as 0.8 percent and Wall Street expected to open 0.5 percent lower.
The Bank for International Settlements this week repeated its view that a stronger dollar poses risks for global markets and financial stability. Investors have largely shrugged off these warnings but stocks felt the heat of the dollar’s latest rise on Wednesday.
“I agree with the consensus interpretation of the key macro trades – higher yields and a stronger dollar – but I’m less persuaded by the expectation of higher global equities,” Stephen Jen of hedge fund Eurizon SLJ Capital said on Wednesday.
“The world’s interest rates have been dragged higher by the U.S. yield curve, creating the risk that interest rates may be too high for the still-fragile economies in Europe and emerging markets,” he said.
U.S. President-elect Trump’s plans to cut taxes and boost infrastructure spending would boost economic activity while his proposals to deport illegal immigrants and impose tariffs on cheap imports are seen driving inflation higher.
That prospect has given rise to expectations that U.S. interest rates will rise faster than previously anticipated, boosting the dollar.
The dollar index, a measure of its value against a basket of currencies, rose to 100.53 on Wednesday <.DXY>, its highest since April 2003.
The dollar rose 0.5 percent against the yen to a five-month high of 109.75 yen <JPY=>, rose to an eight-year high against the Chinese yuan of 6.8703 yuan <CNY=CFXS> and the euro fell below $1.07 for the first time in a year <EUR=>.
“The narrative on the dollar is strong,” said Simon Smith, chief economist at FXPro.
“A move higher in interest rates next month is now a near dead cert, with the implied path for rates next year also moving higher and providing further support for the dollar.”
Benchmark 10-year U.S. Treasury yields rose 5 basis points to 2.29 percent <US10YT=RR>, edging back up toward Monday’s 11-month high of 2.302 percent and up from around 1.86 percent before the election.
U.S. interest rate futures <0#FF:> are pricing in around a 90 percent chance of a rate hike in December, compared to 75 percent before the election.
St. Louis Federal Reserve bank president James Bullard told a conference in London on Wednesday that it would need a surprise for the Federal Reserve not to raise rates next month. The only reason to hold off would be the kind of big shocks that caused it to pull back in the past, such as widespread global market volatility or bad U.S. jobs data, he said.
Earlier, Japan’s 10-year yield rose to 0.03 percent <JP10YT=RR>, its highest in nine months and putting pressure on the Bank of Japan after it announced in September it would cap the 10-year yield at zero as part of its long-standing battle against deflation and anemic growth.
“With 10-year Japanese yields briefly edging back above zero, the market will at some stage focus on whether the Bank of Japan will defend the zero level, especially if the global yield sell-off gathers pace over the coming weeks and months,” Deutsche Bank’s Jim Reid said on Wednesday.
“It would be a strange decision to abandon the new policy so soon after announcing it, so assuming global yields remain elevated they may be forced to buy more (bonds) than they thought when the new scheme was announced,” Reid said.
The rise in global bond yields weighed on European and U.S. stocks. The FTSEuroFirst index of leading 300 European shares <.FTEU3> gave up early gains and fell 0.5 percent, and U.S. futures pointed to a fall of 0.5 percent at the open <ESc1>.
On Wall Street, the Dow Jones industrial average <.DJI> rose 0.29 percent on Tuesday to a record closing high while the S&P 500 <.SPX> gained 0.75 percent. Since Trump’s unexpected victory last week, U.S. shares have rallied while U.S. bond prices tumbled, pushing up their yields sharply.
MSCI’s broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> fell 0.1 percent, its fourth straight loss, while the yen’s slide toward 110 per dollar helped lift Japan’s Nikkei by 1.1 percent <.N225>.
In commodities gold <XAU=> fell 0.2 percent to $1,225 per ounce, not far from a 5 1/2-month low of $1,211.8 seen on Monday, while an oil industry report that showed an unexpected build in U.S. crude stocks helped take this week’s shine off oil prices.
Brent <LCOc1> futures, the global benchmark, fell 1 percent to $46.45 per barrel.