Dollar Logs Biggest Rally Versus Yen Since 1988 on Trump Plans

  • Greenback gains 7.6% in past two weeks on Fed-hike bets
  • Investors expect president-elect to boost fiscal spending

Are Markets Correctly Pricing In Political Risk?

The dollar posted its biggest two-week rally against the yen since 1988 amid bets that Donald Trump’s administration will pursue fiscal stimulus, boosting the U.S. economy and triggering monetary tightening.

The greenback touched the strongest level against the yen since May and appreciated the past 10 trading sessions versus the euro, an unprecedented streak. Traders see an interest-rate increase next month by the Federal Reserve as a virtual lock, enhancing the appeal of dollar holdings.

The U.S. currency’s appreciation over the past two weeks came as Treasury yields surged on bets the Republican president-elect’s spending pledges will spark faster inflation. Fed Chair Janet Yellen suggested Thursday the central bank remained on course to tighten policy next month.

“It’s right to assume that if we get sizable fiscal stimulus, it is and should be dollar-positive,” said Daragh Maher, head of U.S. currency strategy in New York at HSBC Holdings Plc. “That’s the fixation and you don’t fight it.”

The U.S. currency added 7.6 percent over the past two weeks to 110.91 yen, and reached the highest since May. The dollar’s back-to-back weekly gains versus the euro drove it to $1.0588 per euro as it touched the strongest since December.

The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major peers, reached the highest since February. It’s now up 1.5 percent this year, after accumulating losses for most of 2016.

Yellen gave the dollar a boost Thursday as she told Congress a rate increase "could well become appropriate relatively soon." Traders put the chances of a Fed rate increase next month at virtually 100 percent, compared with about 70 percent at the beginning of the month.

“Higher interest rates and the expectation that the Fed not only is likely increase interest rates in December, but probably more quickly next year, have driven the dollar higher,” said Kate Warne, an investment strategist at Edward D. Jones & Co.

— With assistance by Lananh Nguyen

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