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Dollar Hits an 11-Month High as Yields Spike

The U.S. dollar hit an 11-month peak on Monday as the risk of faster domestic inflation and wider budget deficits if Donald Trump goes on a U.S. spending binge sent Treasury and other benchmark global bond yields ever higher.

It was a painful mix for assets in many emerging market countries. Currencies from the Mexican peso to the Malaysian ringgit fell to new lows, but for European share markets it made for a strong start to the week.

The German share prize index (DAX) board is seen at the trading room of Frankfurt's stock exchange
The German share prize index (DAX) board is seen at the trading room of Frankfurt's stock exchange. REUTERS/Kai Pfaffenbach

The pan-European STOXX 600 index rose 1.1 percent, underpinned by gains among banks on hopes higher interest rates will help their profits and mining companies, which have been cheering Trump's promise of major infrastructure spending.

The reflation trade also saw futures for the S&P 500 and Dow Jones industrial add another 0.5 percent after the Dow chalked up best week in five years last week.

The dollar bounded toward 108 yen and hit the eye-catching 100 threshold against a basket of currencies in brisk trade. That took the pace off a resurgent sterling and saw the euro slide to its lowest since the start of the year at around $1.0745.

"Clearly the market has settled on a 'buy dollar' theme on the basis there will be a debt-fueled U.S. fiscal binge that will push up inflation," said TD Securities European Head of Currency Strategy Ned Rumpeltin.

"People are repricing the Fed on the basis of that so it all seems to be a relatively straight forward."

The dollar has been on a tear since the victory of Republican Trump in the U.S. presidential election on Nov. 8 triggered a massive sell-off in Treasuries.

Yields on the U.S. 10-year Treasury notes climbed to their highest since January on Monday at 2.22 percent , while 30-year paper reached 3 percent. German 30-year yields topped 1 percent for the first time in more than six months.

Just two days of selling last week wiped out more than $1 trillion across global bond markets, the worst rout in nearly a year and a half, according to Bank of America Merrill Lynch.

The jump in yields on safe-haven U.S. debt threatened to suck funds out of emerging markets, while the risk of a trade war between the United States and China is also causing jitters.

"There are signs that higher bond yields and the knock of a stronger US dollar are having a domino impact, taking down the weakest risky assets first, before moving on to the next," said Alan Ruskin, global co-head of forex at Deutsche.

"There is only so much financial conditions tightening that risky assets can take when fiscal stimulus is still 'a promise' that lies some way in the future."

The stampede from bonds has seen 30-year yields post their biggest weekly increase since January 2009.