The dollar hovered near a 3-1/2-month high versus the yen on Friday, after making big gains overnight as the markets prepared for a Donald Trump presidency that could stimulate the US economy fiscally and lift interest rates. The US currency dipped slightly to 106.610 yen after surging to 106.950 yen overnight, its highest since July 21.
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The greenback was set to end the week with a 3.3 percent gain against its Japanese peer, which was initially expected to emerge on the winning end due to its perceived safe-haven status upon a Trump victory in the US presidential elections. The fast pace of the dollar’s appreciation against the yen prompted a response from Japan’s Finance Minister Taro Aso, usually known to make statements when the currency pair moves in the opposite direction.
“It is exceptional for the yen to move 5 yen (against the dollar) in two days,” he told reporters, stressing the importance of market stability. The dollar had slumped briefly towards 101 yen on Wednesday when the Republican candidate, feared by the markets as an unknown entity, edged out Democrat Hillary Clinton.
But the currency has rallied hard since, along with an ebb in broader risk aversion accompanied by a surge in US yields amid expectations that Trump’s policies would boost spending and inflation.
“The 20 to 30 basis jump in Treasury yields has been the biggest booster for the dollar. It’s been euphoria in the market over the past few days, although dollar/yen might have a tough time cracking 107 for now following finance minister Aso’s comments,” said Ayako Sera, senior market economist at Sumitomo Mitsui Trust. She added the dollar has also drawn support as expectations that the Federal Reserve may not hike interest rates in December following a Trump win has dissipated.
Trump’s plans call for massive tax cuts and infrastructure building which could increase the US budget deficit. US long-dated Treasury yields have duly risen to their highest in more than 10 months. “Should the US reflation trade gain traction and longer dated US Treasury yields move higher in an orderly manner (potentially accompanied by tighter Fed policy), this is likely to send dollar/yen higher,” wrote currency strategists at ING.
Still, they cautioned against complacency. “In contrast, should the main theme of the Trump presidency turn into protectionism, the safe haven yen is likely to rally, with dollar/yen moving well below the 100 level.”
Reflecting such concerns, the Mexican peso was stuck at 20.58 pesos to the dollar, in close proximity of a record low seen on Wednesday. Other emerging currencies like the Brazilian real, South African rand and Indonesian rupiah have also felt the pinch of Trump’s win. His anti-trade rhetoric has spooked emerging markets, and rising US yields have reduced the appeal of their currencies.
The euro treaded water at $1.0902 after losing 1 percent overnight. The common currency was on track to fall 2.3 percent on the week. The US currency was little changed against the safe-haven Swiss franc at 0.9867 franc after sliding to a near three-month low of 0.9550 franc on Wednesday in a knee-jerk reaction to Trump’s win.
Sterling stood its ground against the dollar, trading just below a one-month high of $1.2585 touched on Thursday. The pound was supported by its big gains against the euro, as investors unwound short positions as uncertainty about the fallout from the US election and began focusing on upcoming European political risks.
The New Zealand dollar remained on the back foot after the country’s central bank cut interest rates on Wednesday. The kiwi slipped 0.2 percent to $0.7198, poised to lose nearly 2 percent this week. The Australian dollar, sensitive to swings in risk appetite, was down 0.2 percent at $0.7598 and on track for a 1 percent weekly drop.