Dollar climbs along with U.S. yields but Asia shares divided

SYDNEY The U.S. dollar touched a nine-month peak in Asia on Monday as the risk of faster domestic inflation and wider budget deficits sent Treasury yields ever higher, a painful mix for assets in many emerging market countries.

The dollar bounded above 107 yen in brisk morning trade to hit 107.37 JPY=, while the euro touched its lowest since January around $1.0773 EUR=. It also made a nine-month high against a basket of currencies .DXY.

The dollar has been on a tear since the victory of Republican Donald Trump in the U.S. presidential election on Nov. 8 triggered a massive sell off in Treasuries.

Yields on the U.S. 10-year Treasury notes climbed to their highest since January on Monday at 2.20 percent US10YT=RR.

Just two days of selling last week wiped out more than $1 trillion across global bond markets, the worst rout in nearly 1-1/2 years, according to Bank of America Merrill Lynch.

The jump in yields on safe-haven U.S. debt threatened to suck funds out of emerging markets, while the risk of a trade war between the United States and China soured the mood in Asia.

“There are signs that higher bond yields and the knock of a stronger US dollar are having a domino impact, taking down the weakest risky assets first, before moving on to the next,” said Alan Ruskin, global co-head of forex at Deutsche.

“There is only so much financial conditions tightening that risky assets can take when fiscal stimulus is still ‘a promise’ that lies some way in the future.”

MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS was off 1.1 percent having suffered its lowest close since mid-July on Friday.

In contrast, Japan’s Nikkei .N225 jumped 1.5 percent on the weakening yen to reach its highest in nine months.

It got an added fillip from data showing Japan’s economy grew at an annualized rate of 2.2 percent in the third quarter, handily beating forecasts.

E-mini futures for the S&P 500 ESc1 added another 0.3 percent early on Monday.

The Dow .DJI romped up 5.4 percent last week in its best performance since 2011. The S&P 500’s .SPX 3.8 percent gain for the week was its strongest in two years.

Investors have favored drug and bank stock to reflect Trump’s campaign promises to simplify regulation in the health and financial sectors.

INFLATION ON HORIZON

The stampede from bonds has seen 30-year yields post their biggest weekly increase since January 2009.

With the Republicans controlling Congress, there was a real prospect Trump could enact deficit-financed tax cuts and infrastructure spending, ending years of policy deadlock.

The resulting boost to inflation would only be heightened should Trump go through with plans for slapping tariffs on imports and deporting migrants.

The result was a surge in inflation expectations.

One market rate, measuring expected inflation over the five-year period that begins five years from today, shot up 30 basis points to 2.46 percent USIL5YF5Y=R last week, the highest since late 2014. It had been as low as 1.84 percent in June.

Fed fund futures <0#FF:> in turn imply a better-than-70 percent probability the Fed will hike rates in December.

Yet rising bond yields are tightening financial conditions at a pace that might appear premature to policymakers.

This was a point underlined by Fed Vice Chair Stanley Fischer on Friday, saying the central bank was monitoring long-term U.S. government borrowing costs even as the economy appeared strong enough to proceed with gradual rate rises.

Elsewhere, the New Zealand dollar eased after a powerful earthquake rocked the island nation early on Monday, killing at least two people and prompting a tsunami warning that sent thousands fleeing to higher ground.

The currency dipped to $0.7092 NZD=D4, with losses limited by talk rebuilding work would support an already strong economy and lessen the need for further interest rate cuts.

In commodities, the rampant U.S. dollar pressured gold which lost 0.8 percent to $1,216.77 and ounce. Yet industrial metals extended their bull run, with copper adding 2.4 percent CMCU3.

In the oil market, Brent crude LCOc1 lost 5 cents to $44.70 a barrel, while U.S. crude CLc1 eased 12 cents to $43.29.

(Reporting by Wayne Cole; Editing by Eric Meijer and Kim Coghill)