US dollar extends surge as Trump's triumph boosts inflation outlook

[NEW YORK] The US dollar surged to the strongest level since March as investors adjusted to the reality of a Donald Trump administration and increased inflation expectations.

A Bloomberg gauge of the US currency climbed for a second day as benchmark Treasury 10-year yields exceeded 2 per cent, reaching the highest since January.

Investors are seeking clues as to which policies the Republican would pursue and whether they'll be more inflationary than under President Barack Obama. The president-elect went to Washington Thursday to meet Mr Obama, a step toward taking the reins of a divided nation.

The greenback extended gains against most major peers after weakening as much as 3.8 per cent against the yen when early election results Wednesday pointed to an upset victory by the real-estate developer.

Boosting the appeal of holding the US currency, Treasury 10-year yields soared relative to Group-of-Seven counterparts as Mr Trump's win raised the prospect of looser fiscal policy, accelerating inflation and a quicker pace of Federal Reserve interest-rate increases. A bond-market measure of inflation expectations reached the highest since July 2015.

"The dollar will do very well" on a broad trade-weighted basis in the next 12 months, Bilal Hafeez, global head of foreign-exchange research at Nomura Holdings Inc in London, said in an interview on Bloomberg Television.

"The Fed will be increasing interest rates, the US will be engaging in fiscal stimulus of some kind, which is much-needed by economies around the world, so we'll have faster growth and more inflationary pressures."

The Bloomberg Dollar Spot Index, which tracks the currency against 10 major peers, advanced 0.8 per cent as of 5pm in New York.

The US dollar rose 1.1 per cent to 106.83 yen, touching the highest since July. It strengthened for a fourth day to US$1.0893 per euro.

Predictions Defied

The US currency defied predictions in a Bloomberg poll of the top foreign-exchange forecasters earlier this month that it would drop to 100.28 yen on a Trump win.

"The broad tone is supportive of US dollar gains," said Lennon Sweeting, Toronto-based head of corporate trading and chief market strategist at HiFX, a currency and payments company.

"US yields have risen impressively and the big story is going to be interest-rate differentials - policy divergence is going to intensify."

Mr Trump's proposals include pledges to cut taxes and spend as much as US$500 billion on infrastructure. The odds that the Fed will tighten policy in December have risen to 82 per cent from 76 per cent at the end of last week, based on futures.

"The market has taken a second look at the implication of potential Trump fiscal policies," said Jane Foley, a senior currency strategist at Rabobank International in London.

"But there's a long journey to go" before the market knows which of the president-elect's campaign promises will become reality and "while the reading today is dollar-positive there's a lot of volatility in store for the coming months."

BLOOMBERG