Dollar sits atop one-year peak as Powell sends yields up, China data mixed

British Pound

Reuters: The pound dropped to its lowest against the dollar since early July on Thursday, brushed aside by the U.S. currency's relentless rise following Donald Trump's U.S. election victory. Those developments are swamping British news for investors, although they will be keeping an eye on finance minister Rachel Reeves' first Mansion House speech to leaders of the City, as well as remarks from Bank of England governor Andrew Bailey. Reeves said in advance that she wants Britain to build a slew of "megafunds" with up to 80 billion pounds ($102 billion) in fresh investment firepower, under plans for the biggest shake-up in British pensions seen in decades.

Sterling was last down 0.6% on the dollar at 1.2632, its lowest since July 2, falling through its early August low in mid-morning London trading. The move was largely in line with peers. The euro was down 0.6%, at a one year low, and the dollar was around 0.5% higher on the Japanese yen and the Swiss franc. "Cable (pound/dollar) is a dollar story at the moment," said Nick Rees, currency analyst at Monex Europe. Higher trade tariffs and tighter immigration under the incoming Trump administration are projected to fuel inflation, potentially slowing the Federal Reserve's rate cutting cycle longer term.

These, alongside expectations for deeper deficit spending and higher short term economic growth are lifting Treasury yields, providing the dollar with additional support. The benchmark 10-year Treasury yield hit 4.483% on Thursday, its highest since July. The pound was steady on the euro at 83.12 pence to the common currency. It has been gradually strengthening in recent months, "a reflection of European political risk which should be negative for the euro," said Rees, pointing to the situation in France and Germany.

The collapse of Germany's ruling coalition last week forced the country into a snap election that will is likely to take place in February, while the French government is trying to push its draft budget for next year over the line, despite lacking a majority in parliament.

US Dollar

Reuters: The dollar was headed for its best week in more than a month on Friday, buoyed by expectations of fewer Federal Reserve rate cuts and the view that Donald Trump's policies could further stoke inflation when he assumes office in January. The greenback hovered near a one-year high against a basket of currencies at 106.88 , eyeing a weekly gain of 1.8%, which would mark its best performance since September. The euro was in turn on track for its worst weekly performance in seven months with a fall of 1.75%. The common currency last bought $1.0530, languishing near a one-year low hit in the previous session.

Traders reacted by paring bets of the pace and scale of future U.S. rate cuts, with Fed funds futures now implying just 71 basis points worth of easing by end-2025. Pricing for a 25 bp rate cut next month has also fallen to just 48.3% from 82.5% a day ago, according to the CME FedWatch tool. "Markets just took Powell's comments at face value and therefore scaled back expectations for the pace of FOMC cuts," said Carol Kong, a currency strategist at Commonwealth Bank of Australia.

"We still think a December 25bp cut is likely. I think that's a reasonable baseline, but I think Powell's comments just underscored the resilience of the U.S. economy. "Markets are going to focus on the prospect of President Trump's policy platform, so in the near term, we could see further gains in the U.S. dollar." Higher trade tariffs and tighter immigration under President-elect Trump's incoming administration are projected to fuel inflation, potentially slowing the Fed's easing cycle longer term.

Expectations for deeper deficit spending are also lifting U.S. Treasury yields, providing the dollar with additional support. Against a resurgent dollar, the yen has once again come under the spotlight, as it continues to weaken deeper into a territory that triggered intervention from Japanese authorities in the past. The yen was last 0.2% lower at 156.57 per dollar, on track for a weekly decline of 2.5%. The Japanese currency has fallen some 11% since its September peak and weakened past the 156 per dollar level for the first time since July in the previous session.

"The pace always matters more than the level. Given the yen has already weakened by 11% against the dollar over the past two months, I think we are getting closer to an actual intervention," said CBA's Kong. Data on Friday showed Japan's economy expanded by an annualised 0.9% over the July-September quarter, slowing from the previous three months due to tepid capital spending. Elsewhere, the Australian dollar eased 0.06% to $0.6450 and was set to lose just over 2% for the week, its worst weekly performance in four months.

The New Zealand dollar was similarly eyeing a weekly fall of 2%. It last edged 0.05% lower to $0.5846, languishing near a one-year low. In cryptocurrencies, bitcoin dipped back below the $90,000 level as some investors took profits after a stellar run. The world's largest cryptocurrency has surged nearly 30% on a two-week rolling basis on the view that friendlier U.S. regulation was imminent under Trump's administration and could usher in a new boom for all corners of the asset class.

Still, some remain cautious on bitcoin's relentless rally and the risks involved with its volatility. "There are several risks factors that are converging. With crypto at all-time highs, both FOMO and risks are also at all-time highs," said Joshua Chu, co-chair of the Hong Kong Web3 Association. "This factor in the traditional profit-taking rule means that non-institutional investors chasing after the FOMO rally will be taking on considerable risks."

South African Rand

Reuters: South Africa's rand firmed slightly on Thursday after four days of losses as the dollar benefited from Donald Trump's U.S. election win. At 1519 GMT, the rand traded at 18.2275 against the dollar, about 0.1% firmer than its previous close. The rand has traded turbulently, having lost almost 5% against the greenback, since the U.S. election last week, with investors expecting Trump's policies to bring higher short-term economic growth and also potentially inflationary pressures.

Potential policy changes include tariffs and tax cuts. "Volatility will likely remain the order of the day as markets grab at anything they can get a hold of regarding prospective U.S. policymaking under Trump," said Danny Greeff, co-head of Africa at ETM Analytics. An improvement in South African mining output in September did little to support the rand on Thursday. The output rose 4.7% year-on-year in September from 0.3% in August, Statistics South Africa data showed.

On the Johannesburg stock market, the blue-chip Top-40 index closed flat. South Africa's benchmark 2030 government bond was little changed, with the yield at 9.145%.

Global Markets

Reuters: The U.S. dollar was poised for big weekly gains on Friday, towering near one-year highs as a hawkish turn from the Federal Reserve chief sent short-term Treasury yields higher, leaving Wall Street and European futures in the red. Asian shares looked to end a brutal week on a steadier note, helped by Chinese data retail sales in the world's second-biggest economy beat forecasts in October in a welcome sign for consumer spending, although other indicators missed. Overnight, Fed Chair Jerome Powell said there was no need to rush rate cuts with the economy still growing, the job market solid and inflation still above the 2% target, tempering expectations for a rate cut next month.

Fed fund futures for next year slumped with December off 7 ticks and imply just 71 basis points of rate cuts by end-2025. A rate cut next month is no longer a high probability event, with just 61% priced in, down from 82.5% in the prior session. That lifted the dollar across the board, especially against the euro as expectations for more aggressive policy easing in Europe further undermined the single currency already trading at one-year lows. Goldman Sachs now sees a greater risk that the Fed could slow the pace of easing sooner, possibly as soon as the December or January meetings, while JPMorgan still tips the Fed to cut in December though they expect the central bank could dial down the easing pace in January.

"After the sugar hit of Trump’s election and its subsequent impacts on expectations for company profits, the market’s enthusiasm is being watered-down by greater interest rate uncertainty, especially going into next year," said Kyle Rodda, a senior analyst at Capital.com. On Friday, Nasdaq futures fell 0.4% while S&P 500 futures eased 0.3%. EUROSTOXX 50 futures fell 0.5%. MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.2% but was still down 4.3% for the week, the biggest weekly loss in more than two years.

A regional healthcare index underperformed with a drop of 1%, after U.S. President-elect Donald Trump nominated Robert F. Kennedy Jr., a prominent vaccine sceptic, to lead the top US health agency. Tokyo's Nikkei, however, gained 0.7% driven by a pull back in the yen, which boosted the outlook for Japanese exporters. Still, it was down 1.7% for the week. The dollar gained for five days on the yen, up another 0.2% to 156.51 , about the highest level since July. But yen bears were on guard as Japan's finance ministry kept up its warnings of government action against excessive currency moves.

Bank of Japan also announced governor Kazuo Ueda will deliver a speech on Monday, which will be watched for any hints on the timing of the next rate hike. Chinese shares trimmed earlier losses as official data showed retail sales rose by a better-than-expected 4.8% in October, but growth in industrial output missed forecasts and declines in property investment deepened. China's blue chips were last down 0.1% while Hong Kong's Hang Seng index rose 0.9%. In the U.S. policy front, even before Powell spoke, producer prices data showed that the core gauge surprised slightly to the upside, which also had markets worried about the pace of easing ahead.

Short-term Treasury yields shot up overnight and remained elevated on Friday. The two-year yields held at 4.36%, having jumped 6 basis points overnight to close at 4.357%. In the currency markets, the dollar is set for a big weekly gain of 1.6% against its major peers. The euro nursed heavy losses at $1.0540 and is set for a hefty weekly loss of 1.7%. Minutes of the latest meeting from the European Central Bank showed the cut last month was likely an insurance move. Markets are, however, more dovish on the ECB and see a decent 36% chance it could step up its easing in December with a half-point move to guard against growth risks.

They are also wagering that the ECB will have to cut at each meeting until mid next year. The lofty dollar pressured commodity prices, with gold prices down 4.3% this week to $2,568.55, bringing the monthly loss so far to a sizeable 8%. Oil are also down for the week. Brent crude futures are set for a weekly loss of 2.3% and were last at $72.15 a barrel.

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