Dollar, U.S. yields in retreat as 'Trump trade' unwinds

© Reuters. A man looks at an electronic board showing Japan's Nikkei average outside a brokerage in Tokyo© Reuters. A man looks at an electronic board showing Japan’s Nikkei average outside a brokerage in Tokyo

By Hideyuki Sano

TOKYO (Reuters) – The U.S. dollar wobbled near three-week lows and U.S. bonds were bought back with the 10-year yield at one-month lows on Friday, as investors wound back ‘Trump trade’, helping to lift the world’s stocks to 1-1/2-year highs.

Asian shares were no exception, with MSCI’s broadest index of Asia-Pacific shares outside Japan () up 0.1 percent in early trade, and Australian shares () at a 1-1/2-year high.

Japan’s Nikkei (), however, dropped 0.7 percent due to the yen’s gains.

“What’s going on is a correction of the ‘Trump trade’ since the election. The markets have been trying to fully price in his policies just based on hopes,” said Koichi Yoshikawa, executive director of finance at Standard Chartered (LON:) Bank. “From now on, it’s not going to be a simple one-way bet.”

The victory of Republican Donald Trump in the U.S. presidential election in November had sparked a major realignment in markets.

Expectations of his tax cuts, fiscal spending and deregulations have boosted U.S. bond yields and the dollar, to the detriment of many emerging economies that have benefited from cheap dollar funding and capital inflows from investors shunning low U.S. yields.

The dollar slumped to a three-week low of 115.21 yen , having shed 1.6 percent on Thursday, its biggest fall in five months. It last stood at 115.54 yen.

The euro also posted its biggest gain in seven months, of 1.1 percent, on Thursday and last fetched $ 1.0590 .

The dollar’s index against a basket of six major currencies () <=USD> tumbled to 101.40, falling more than two percent from its 14-year high of 103.82 set on Tuesday.

Fuelling the dollar’s retreat was China’s move this week to clamp down on capital outflows and stem the fall in the yuan ahead of Trump’s inauguration on Jan. 20.

The cost of borrowing the yuan has surged this week in Hong Kong, the main trading center, making it too costly for speculators to sell the yuan against the dollar.

The offshore yuan gained more than two percent in the last two sessions, their biggest two-day gains on record, to a two-month high of 6.7833 per dollar. It last stood at 6.7939.

Investors also rushed out of their selling positions in U.S. bonds, one of the most convincing plays since the election because Trump’s policies are seen as stoking inflation.

The 10-year U.S. Treasuries yield hit a one-month low of 2.344 percent (), having fallen about 30 basis points from its two-year high of 2.641 percent touched on Dec. 15.

Investors also scaled back their expectations of the Fed’s rate hikes this year, with Federal Funds rate futures <0#FF:> pricing in two rate hikes compared with two and a half at the peak in December.

Markets largely shrugged off U.S. economic data published on Thursday which was generally strong.

The increase in private payrolls was on the weaker side of market expectations, however, raising some concerns about the upcoming jobs data due at 1330 GMT.

On Wall Street, the S&P 500 Index () dipped 0.1 percent as retailers such as Macy’s (N:) and Kohl’s (N:) slumped on weak holiday sales.

Financials were also hit by a fall in U.S. bond yields but hi-tech shares, which have underperformed since Trump’s election victory partly on concerns about his rocky relationship with Silicon Valley, shone.

The Nasdaq Composite () rose 0.2 percent to hit a record high, led by gains in online retailer Amazon.com (O:).

The dollar’s decline also helped to underpin many emerging markets, lifting MSCI’s broadest gauge of the world’s stock markets () to 1-1/2-year high. It is up 1.8 percent since the start of 2017.

Oil prices held firm, supported by news that Saudi Arabia had cut production to meet OPEC’s agreement to reduce output.

International benchmark Brent crude futures () rose 0.8 percent to settle at $ 56.89 a barrel on Thursday.

West Texas Intermediate crude () were traded at $ 53.71 a barrel, down 0.1 percent in Asia but still up 1.2 percent for the week.

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