The US dollar scaled an eleven-month peak on Tuesday and Treasury yields extended their rise as investors braced for higher inflation in the United States amid expectations of fiscally expansionary polices under Donald Trump’s presidency. The risks of faster-than-expected Federal Reserve rate increases have dragged on emerging market assets, particularly equities and currencies, which have benefited from large capital inflows.
MSCI’s broadest index of Asia-Pacific shares outside Japan was flat in early trades while Australian stocks were off 0.5 percent.
“The immediate driving force is the anticipated policy mix in the US,” said Brown Brothers Harriman analysts in a note to clients.
“While most economists are focusing on either the higher US interest rates and a likelihood of a somewhat more aggressive Fed tightening cycle, or the possibility of a dramatically more stimulative fiscal stance. We see the combination (the policy mix) as an exceptionally potent force that will continue to propel the dollar higher,” the analysts wrote.
U.S. stocks consolidated recent gains with the Dow ending at a record high on Monday while the S&P 500 and the Nasdaq Composite dipped after choppy trading.. U.S. stock futures were broadly flat in early trade.
In currency markets, the dollar was trading at 107.88 yen after hitting its highest level in more than five months overnight. It also consolidated near a eleven-month high against basket of currencies hit overnight.
The dollar has been on a tear since the shock victory of Trump in the U.S. presidential election on Nov. 8 triggered a massive sell off in Treasuries.
The large moves in markets has been stoked by expectation that Trump’s promised infrastructure spending and tax cuts will spur higher U.S. growth, pushing up inflation as well as borrowing costs.
Yields on the U.S. 10-year Treasury notes climbed to their highest since January to 2.22 percent on Monday, while 30-year paper reached 3 percent.
Just two days of selling last week wiped out more than $1 trillion across global bond markets, the worst rout in nearly 1-1/2 years, according to Bank of America Merrill Lynch. In the oil market, Brent crude was broadly flat at $44.73 a barrel, while U.S. crude rose 0.81 percent to $43.67.