The dollar scaled to its highest level in almost 14 years against a basket of currencies on Friday, while U.S. bond yields were set for the biggest fortnightly rise in 15 years on bets U.S. inflation and interest rates are headed higher.
A growing perception that the economic policies of U.S. President-elect Donald Trump will push up consumer prices helped put the dollar on track for its biggest two-week rise against the Japanese yen in almost 30 years.
European shares nudged lower in early European trade .GDAX .FTSE .CAC, while Italian bonds bore the brunt of selling in regional debt markets, with borrowing costs set for their biggest two-week rise since the 2012 euro zone debt crisis.
In Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS slipped 0.4 percent to hover just above four-month lows touched earlier in the week. It looked set to log its fourth straight week of losses.
The dollar’s rise against the yen JPY= raised hopes of an earnings boost to Japanese exporters, lifting Japan’s Nikkei average .N225 to a 10-month high. The blue-chip stock index closed 0.6 percent higher.
Data on Thursday suggesting the U.S. jobs market is tightening and inflation is gaining traction have bolstered a view that U.S. growth and inflation could accelerate if the Trump administration cuts taxes and increases fiscal spending.
Last week’s unexpected U.S. election result has prompted investors to ditch their once rock-solid 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.
“What we’re looking at is a broad shift of investment back to the U.S.,” said Richard Cochinos, Citi’s head of G10 currency strategy in London.
“There are expectations for tax cuts next year – which were part of the Trump campaign’s promises – and then there’s also the idea of what type of fiscal boost are you going to have. That’s what’s driving asset prices – it’s people’s expectations for the fiscal impulse next year,” he said.
The 10-year U.S. Treasury yield US10YT=RR rose to 2.34 percent, its highest since December. It is up about 55 basis points over the last two weeks — the biggest fortnightly rise in 15 years and the second biggest in almost 30 years.
In Europe, Italian 10-year bond yields rose 8 basis points to 2.12 percent IT10YT=TWEB, racking up 44 bps over the last fortnight in its biggest surge since May 2012.
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 destabilize 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 in December.
Fed Chair 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 percent chance of a 2017 rate hike.
The dollar’s index against a basket of six major currencies .DXY, =USD rose to 101.37, its highest level since April 2003. It has risen over 4 percent in the last two weeks, its biggest fortnightly rise since March 2015.
A rising dollar is a problem for some emerging economies that could see potentially destabilizing capital outflows.
The Mexican peso MXN=, which has been perceived as the most vulnerable to Trump’s policies because of Mexico’s exports to the United States and the president-elect’s attitude to immigrants from Mexico, weakened 1 percent after the central bank raised its policy interest rates by 50 basis points to defend the currency, as the market had expected a bigger hike.
The Turkish lira TRYTOM=D3 hit a record low, having fallen more than 8 percent so far this week, hit by signs of more discord between Turkey and Europe.
Gold XAU= fell to 5 1/2-month low of $1,203.86 per ounce and oil prices, which have been supported by hopes the Organization of the Petroleum Exporting Countries (OPEC) would reach an agreement to cap production at its meeting in Vienna on Nov. 30, were hit by the dollar’s strength.
Brent crude futures <LCOc1 > fell 0.7 percent to $46.17 per barrel, down further from Thursday’s two-week high of $47.62.