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Wall Street dips after dollar hits 13-year high

Wednesday 17:00 GMT. US and European stocks were softer as the dollar hit a 13-year high and bond yields eased off multi-month peaks, as investors reined in bets that US president-elect Donald Trump’s pledge of infrastructure spending and tax cuts would accelerate inflation.

In Europe, Germany’s Dax fell 0.7 per cent as shares in Bayer fell 4.2 per cent after the drugmaker raised €4bn to pay for proposed acquisition of Monsanto. The UK’s FTSE 100 closed down 0.6 per cent.

Oil dropped after a weekly report showed a bigger-than-expected 5.3m-barrel rise in US crude inventories to 490.3m barrels, well above the November average.

Brent crude declined 0.7 per cent to $46.61 a barrel, partly erasing a 5.7 per cent bounce in the previous session on fragile hopes the Opec cartel could agree a production cut at its meeting in Vienna at the end of the month.

London-listed miners also were struggling for momentum after China-traded iron ore futures fell 6 per cent.

Initially helping the mood across global financial markets was the previous day’s rally on Wall Street, where the S&P 500 on Tuesday closed within half a per cent of a record high and the Dow Jones Industrial Average of just 30 price-weighted stocks entered virgin territory, closing at 18,923.

But Wednesday saw the S&P 500 dipping 5.9 points to 2,174 as investors looked warily at a continuation of the “Trumpflation trade”, where expectations that president-elect Trump’s policy of infrastructure spending will boost inflation are delivering surging borrowing costs and a robust dollar.

That helped arrest a climb in bond yields. The 10-year US Treasury yield, which moves opposite to the note’s price, eased back to 2.21 per cent after it approached 2.30 per cent earlier in the day, close to its high of the year.

Equivalent maturity German Bunds were down 1bp to 0.29 per cent and Japanese paper was up 2bp to 0.01 per cent.

The dollar index (DXY) was nearly unchanged on the day at 100.24, after earlier hitting a 13-year high of 100.53 as investors bet that accelerating inflation may cause the Federal Reserve to raise interest at a faster pace than previously expected over the coming year.

Some traders noted that the DXY’s 14-day relative strength index, a closely watched momentum gauge, rose to 75.0 earlier in the session, moving above the 70 mark that is considered to signal an overbought level.

Sterling was also steady against the dollar at $1.2457 after data showed the UK unemployment rate plumbed a fresh 11-year low.

Gold was nearly flat at $1,228 an ounce, having given up all its gains after a brief surge that followed last week’s US election.

“The price of the precious metal could fall further if (a big if) the dollar and real bond yields continue to surge without these moves undermining the demand for riskier assets,” wrote analysts at Capital Economics. “However, we think it more likely that gold will now recover due to rising inflation and to increased political risks, both in the US and elsewhere.”

“It looks like yesterday was just a pause after all,” said forex analysts at Citi. “US dollar [USD] strength has resumed as we’re back to the post-Trump reflation story and watching yields. US 10-year yields are back on the march higher and most currencies are suffering against USD as a result.”

Emerging market currencies, in particular, were being pressed by the greenback’s latest revival, with the Turkish lira hitting a fresh low.

Among the currency majors, the yen was 0.1 per cent stronger at ¥109.06 after reaching its weakest level since June as the prospect of Fed tightening stood in contrast with more monetary easing expected from the Bank of Japan.

Japan’s exporters like a softer yen and that helped the Nikkei 225 stock average gain 1.1 per cent in a generally upbeat Asia-Pacific performance early in the day.

South Korea’s Kospi rose 0.6 per cent, but Hong Kong’s Hang Seng eased 0.2 per cent and China’s Shanghai Composite was down 0.1 per cent, the latter receiving little help from news that the renminbi is at its weakest against the US dollar since August 2008.

Reporting by Jamie Chisholm in London, Peter Wells in Hong Kong and Gregory Meyer in New York

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Via FT