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Wall Street eases as dollar hits 13-year highs

Friday 17:00 GMT. Wall Street slipped as the dollar climbed to a new 13-year high and US government bond yields hit multi-month peaks on Friday on expectations that president-elect Donald Trump’s policies will boost the economy and deliver tighter monetary policy.

After a mixed Asia-Pacific session, which included Japanese equities entering a bull market, the pan-European Stoxx 600 slide 0.3 per cent.

Investors have been eyeing the benchmark Wall Street gauges as the S&P 500 tests — but has so far failed to cross — a record set earlier this summer. The index slipped 0.2 per cent to 2,182 at midday in New York, leaving the equity benchmark less than 1 per cent below its August record. The Nasdaq Composite touched a new high in early trading before falling back.

Dollar strength has “started to become a bit more of a concern today,” said JJ Kinahan, chief market strategist at TD Ameritrade. “With the Fed rate hike imminent at this point, what pressure does the [stronger dollar] continue to put on these multi-nationals and what does that mean for the next two quarters of earnings.”

US equities, which usually set the global stock market mood, have rallied sharply since Mr Trump won the White House, with investors welcoming the end of election uncertainty. Sectors such as construction and banks have rallied on the view that the new president will deliver a surge in infrastructure spending and a lighter regulatory touch.

The possible economic leg-up that Mr Trump’s supporters believe his policies will deliver has also put a spark under the US currency and caused investors to flee government bonds on expectations that the Federal Reserve may have to raise interest rates faster than expected to contain inflation.

Addressing the US Congress on Wednesday, Janet Yellen, Fed chair, said an increase in short-term interest rates could “become appropriate relatively soon”.

Solid US data, including a four-decade low for weekly jobless claims and US housing starts hitting a nine-year high, also supported the case for tighter monetary policy, with markets pricing in a 98 per cent chance of a rate rise in December.

Policy-sensitive US two-year yields rose 1 basis point to 1.05 per cent, while 10-year Treasuries, which are more sensitive to inflation expectations, inched 3 basis points higher to 2.33, the highest level of the year.

The dollar index, a measure of the US currency against a basket of global peers, climbed 0.4 per cent at 101.32 on Friday — at one point reading its highest since April 2003 — and on track for the 10th straight day of gains, which would be the longest winning streak since 2012.

Among developed economy currencies it is the euro and yen that have been notably affected by the dollar’s bounce. The single currency is down 0.3 per cent to $1.0590, and suffering its longest losing streak. The Japanese yen softened 0.4 cent softer to ¥110.61, its weakest since May, having lost 5 per cent since Mr Trump’s election.

China’s renminbi was 0.1 per cent softer against the dollar after the country’s central bank set the band around which the currency can trade weaker for a record 11th session in a row. The Shanghai Composite equity index dipped 0.5 per cent but Hong Kong’s Hang Seng, which tends to more closely follow moves on Wall Street, added 0.4 per cent.

The Mexican peso was weaker after the country’s central bank on Wednesday raised interest rates by 50 basis points to 5.25 per cent but said the election of Mr Trump had caused economic uncertainty. The peso has dipped 0.1 per cent to 20.4357 per dollar.

The weaker yen was good news for exporter-sensitive Japanese stocks, however, with the Nikkei 225 on Friday gaining 0.6 per cent to 17,967, lifting the benchmark 20 per cent from a recent low — a move that some analysts consider a technical bull market.

Tokyo’s equity gains came as benchmark Japanese government bond yields rose 3 basis points to 0.02 per cent, their highest since February as they took part in the “Trumpflation trade” powered out of the US.

Gold has tended not to like a firmer dollar and rising interest rates, and so the bullion declined $7 to $1,209 an ounce. In energy, the price of Brent crude fell 0.3 per cent to $46.36 a barrel.

Additional reporting by Peter Wells in Hong Kong and Eric Platt and Nicole Bullock in New York

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Via FT