Dollar charges to 14-year high against basket of currencies

The US dollar has climbed to its highest level since 2003 on continued bets on faster inflation and higher interest rates, while US government bonds resumed a sell-off that left benchmark long-term interest rates on track to post their steepest two-week increase in 13 years. A growing perception that the economic policies of US president-elect Donald Trump will lift consumer prices pushed the dollar higher, weighing on crude and other commodities.

Last week’s unexpected US election victory by Trump has led to a repricing of assets, most notably in currency and bond markets. Federal Reserve policymaker James Bullard said on Friday he is leaning towards supporting a rate rise next month, adding that a number of potential changes under Trump could affect future policy.

This drove the US dollar higher. The euro fell 0.3 per cent to $1.0594, now well below its level of $1.11 immediately after the election. The US dollar index – a measure of its value against a range of currencies – hit a high of 101.48, its highest level since April 2003. It has risen over 4 per cent in the last two weeks, its biggest fortnightly rise since March 2015.

The 10-year US Treasury yield rose to 2.355 per cent, its highest since December. In Dublin 10-year bond interest rates rose early on Friday to more than 1 per cent, before easing back to just under 1 per cent later in the day. Irish bond markets lost ground during the week in tandem with international markets, though have performed steadily in the last couple of days. The Italian bond market, meanwhile, remains under pressure ahead of the vote on December 5th on a constitutional amendment which could, if defeated, lead to a general election.

Fiscal spending

Data on Thursday suggesting the US jobs market is tightening and inflation is gaining traction have bolstered a view that US growth and inflation could accelerate if the Trump administration cuts taxes and increases fiscal spending.

Last week’s US election result has prompted investors to ditch their conviction that growth in developed economies will remain tepid because of tough competition from emerging market economies with lower wages. That has led to a repricing of assets, witnessed most notably in currency and bond markets.

In Europe, Italian 10-year bond yields rose 8 basis points to 2.12 per cent, racking up 44 basis points over the last fortnight in its biggest surge since May 2012. They later eased to close at just over 2 per cent.

Banking crisis

Italy has been at the sharp end of the rout as investors fret about the political repercussions of a referendum next month that could further destabilise a country battling a banking crisis and a weak economy.

Rising bond yields across the globe also reflect a reassessment of the Federal Reserve’s policy path down the road beyond a likely rate hike next month.

Federal Reserve chairwoman Janet Yellen said on Thursday that Trump’s election has done nothing to change the Fed’s plans for a rate rise “relatively soon”.

But money markets are starting to price in one or more rate hikes next year, a sea change from before the election when they priced in a less than 50 per cent chance of a 2017 rate hike.