Thursday, 22 December 2016

Dollar retreats from 14-year high, banks drag Europe shares lower

The dollar eased from 14-year highs on Wednesday, giving back some of the gains chalked up since Donald Trump's U.S. election victory, while concerns over banks pulled European shares lower.

Wall Street also looked set to open lower, according to index futures, after the Dow Jones industrial average climbed to within 25 points of the 20,000 mark on Tuesday.

A widespread conviction that Trump's policies will boost the U.S. economy has powered the dollar and Treasury yields since the Nov. 8 election pushed U.S. stocks to record highs.

Some investors seemed ready to cash in the gains in thin pre-Christmas trade, driving a 0.4 percent fall in the dollar index .DXY, which measures the greenback against a basket of major currencies. This had risen 5 percent this year and reached a 14-year peak on Tuesday.

U.S. 10-year Treasury yields, which hit their highest in more than two years last week after the Federal Reserve raised interest rates and forecast more hikes than most investors had expected, fell 1.3 basis point to 2.56 percent .

Benchmark 10-year yields have risen almost 80 bps since early November.

The euro, which touched a 14-year low on Tuesday, rose 0.4 percent to $1.0430 while the yen Jgained 0.6 percent to 117.10 per dollar.

Many analysts still see the dollar rising further, possibly to parity with the euro.

"The euro is in a fight between short-covering pressure and political angst. Economics doesn't come into it at all. If Dow 20,000 is just a number but a magnet all the same, euro parity with the dollar will be every bit as magnetic," said Kit Juckes at Societe Generale.

"We'll get there and get over-excited before too long."

The Swedish crown rose 0.7 percent, its biggest one day rise in six months to a two-month high of 9.6350 to the euro after the Riksbank kept interest rates on hold and expanded its asset-buying program.

European shares fell. The pan-European STOXX 600 index dipped 0.4 percent, having hit an 11-month high on Tuesday, led lower by banking shares .

Italy's Monte dei Paschi di Siena, which must raise 5 billion euros by the end of the month to avoid state intervention, was once again in focus. Its shares dropped 17 percent at one point, before briefly turning positive after lawmakers approved a 20 billion euro plan to prop up the country's weak banks.

Spanish lenders also fell after the European Court of Justice overturned a Spanish court ruling that limited the banks' liabilities for so-called floor clauses in mortgage contracts.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS inched up 0.1 percent after a string of losses. Tokyo's Nikkei share average .N225 also fell, pulling back from earlier one-year highs to close down 0.3 percent.

In euro zone debt markets, German 10-year government bond yields fell 1 bps to 0.25 percent. Among lower-rated bonds, Spanish 10-year yields fell to five-week lows and Italian equivalents also fell on concerns over banks.

The premium over Spain that Italy would pay to borrow in bond markets  briefly topped 50 bps for the first time since just after a Dec. 4 referendum on constitutional reform triggered Italian premier Matteo Renzi's resignation.

Oil prices rose on expectations of a fall in U.S. crude inventories. Brent crude, the international benchmark, rose 0.2 percent to $55.55 a barrel.

Gold edged up 0.3 percent to $1,134 an ounce as the dollar slipped.

"With what we're seeing in the dollar at the moment, there is no real driver to push gold lower," ABN Amro analyst Georgette Boele said.

Reference: Nigel Stephenson

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