Dollar index set for biggest 2-week rise in 20 months

The dollar rose to its highest level since April 2003 against a basket of currencies on Friday and was on track for its largest two-week increase since March 2015, as traders piled bets on a massive dose of fiscal stimulus under a Donald Trump U.S. presidency.

Also stoking the dollar rally were growing expectations the Federal Reserve would raise interest rates next month on signs of rising inflation and improved economic growth.

The greenback has climbed about 7 percent against the yen in two weeks, which would be its steepest such gain since January 1988 and its second-strongest performance in the era of floating exchange rates.

The dollar has been on a tear, along with a surge in U.S. Treasury yields, since Republican Trump’s victory on Nov. 8 over Democrat rival Hillary Clinton.

The surprise outcome briefly spooked financial markets worldwide but they quickly reversed course as traders seized on tax cuts, deregulation and infrastructure spending which Trump campaigned on as positives for the dollar.

“It has caused a wave of dollar buying across the board,” said Richard Scalone, co-head of foreign exchange at TJM Brokerage in Chicago.

To be sure, it is unclear how many if any of these proposals would materialize. Trump’s stance on immigration and trade, if they become law, could hurt the dollar, analysts said.

The dollar index, hit 101.48, its highest since early April 2003 before retreating to 101.27, up 0.4 percent on the day.

This gauge of the greenback against a basket of six major currencies was on track for a 4.4 percent two-week gain, which would be its biggest since March 2015.

While Fed Chair Janet Yellen did not explicitly say the Fed would hike rates at its Dec. 13-14 policy meeting, she told a congressional panel on Thursday that a rate increase was likely “relatively soon.”

Political and economic worries in Europe, Britain and Japan were keeping investors away from those currencies, providing the dollar with another boost, said Richard Cochinos, Citi’s head of G10 currency strategy in London.

The euro, which is vulnerable to a slew of political risks, including an Italian constitutional referendum next month and French and German elections next year, hit an 11-month low of $1.0567. It was last down 0.3 percent at $1.0592.

The greenback hit a 5-1/2 month high against the yen of 110.92, while China’s yuan, which is on track for its biggest yearly drop since 1994, reached a fresh eight-year low.

Source: Reuters