The dollar pulled back yesterday, having risen along with bond yields after President Donald Trump proposed the biggest shake-up of the US tax system in three decades and data bolstered calls for another Fed rate hike this year.
As the dollar’s strength ebbed, emerging market currencies and commodities also began to recover, while Wall Street was expected to see a lacklustre start having risen on Wednesday in reaction to Trump’s tax blueprint.
European stocks and Japan’s Nikkei gave it a cautious thumbs-up too.
Banks rose to seven-week highs, though they then began to fade, while miners struggled and underwhelming results from one of Europe’s biggest fashion chains, H&M, weighed on retailers.
The prospect of higher US debt levels and expectations of a Fed hike sent 10-year Treasury yields to their highest since mid-July, with the two to 10-year yield curve steepening to its highest in a month.
The week’s dollar rally remained largely intact despite its pre-US trading pause. Its earlier gains had been most marked against Japan’s yen, as it probed above 113 yen.
Traders also eyed a jump in Japan’s 10-year government bond yield toward levels at which the Bank of Japan would be expected to buy bonds to maintain its zero per cent target for long-term rates.
Euro/dollar held just above $1.1775, with European benchmark bond yields climbing in the slipstream of Treasuries.
The 10-year yield gap between US and German debt widened to 185 basis points, however, its widest since early July.
Emerging markets were the big losers from the dollar and Treasury yield spike higher. MSCI’s emerging markets equity index was down 0.5 per cent and on course for its sixth straight daily decline. That would be the index’s longest losing streak since May 2016.
Trump’s tax plan offered to lower corporate income tax rates, cut taxes for small businesses and reduce the top income tax rate for individuals.
Also helping to boost the dollar, the plan included lower one-time low tax rates for companies to repatriate profits accumulated overseas, which analysts say would lead to a temporary phase of sizable dollar buying.
Commodities prices were also clawing back having been dented by the revitalised dollar.
Tensions in northern Iraq helped Brent back to $58.271 a barrel, just down from Tuesday’s 26-month peak of $59.49, while US West Texas Intermediate crude (WTI) fetched $52.67 per barrel to strike a new five-month high.
Gold, often regarded as a safe-haven but an asset which has little to offer when inflation is rising, steadied at $1,284 an ounce having fallen to a more than one-month low of $1,278.36.