Published : 2 weeks ago, on 25/11/2024

By Wayne Cole and Medha Singh

(Reuters) -The dollar retreated on Monday after a stellar run as the pick for U.S. Treasury secretary seemed to reassure the bond market about fiscal discipline, pulling yields lower and shaving some of the currency’s rate advantage.

Yields on 10-year Treasuries slipped 6 basis points to 4.361% as President-elect Donald Trump’s choice of fund manager Scott Bessent was welcomed by the bond market as an old Wall Street hand and fiscal conservative.

However, Bessent has also openly favoured a strong dollar and supported tariffs, suggesting any pullback in the currency might be fleeting.

The dollar has risen for eight consecutive weeks with many technical indicators flashing overbought on bets Trump’s policies would stoke inflation and further support the greenback.

“Pricing in various U.S. assets was pushed quite aggressively in one direction for three weeks,” said Geoff Yu, senior macro strategist at BNY.

“Markets probably need to take a breather when it comes to their dollar positions.”

The dollar index was last at 107.22, down about 1% from its two-year high of 108.090 on Friday. The greenback dipped 0.3% versus the Japanese yen to 154.25, and further away from its recent peak of 156.76.

The euro edged up 0.6% to $1.0485 and away from Friday’s two-year trough of $1.0332.

RATE OUTLOOKS DIVERGE

The euro zone’s single currency had taken a hit on Friday as European manufacturing surveys (PMI) showed broad weakness, while U.S. surveys surprised on the high side.

The contrast saw European bond yields fall sharply, widening the gap with Treasury yields to the benefit of the dollar. Markets also priced in more aggressive easing from the European Central Bank, with the probability of a half-point rate cut in December rising to about 40%.

Maybe it’s time euro weakness fades heading into the ECB decision because a lot of dovishness has been priced in but more importantly, because euro dollar has been so aggressively sold,” Yu said.

At the same time, futures scaled back the chance of a quarter-point rate cut from the Federal Reserve in December to 56%, compared to 75% a month ago, according to CME Group’s Fed Watch Tool.

Markets now imply about 150 basis points of ECB easing by the end of next year, compared to around 70 basis points from the Fed.

Minutes of the Fed’s last meeting are due on Tuesday and will offer more clues on the U.S. central bank’s thinking behind policy moves so far.

Also due this week are figures on U.S. and EU inflation, which will further refine the outlook for rates.

Data on UK retail sales also disappointed, data showed on Friday, leading the market to price in more chance of a rate cut from the Bank of England, albeit in February rather than December.

Sterling bounced 0.3% to $1.2562 after hitting a six-week low on Friday at $1.2484.

In the crypto world, bitcoin was trading at $98,126 and off last week’s record top of $99,830, having run into profit taking ahead of the symbolic $100,000 barrier.

Bitcoin has climbed more than 40% since the U.S. election on expectations Trump will loosen the regulatory environment for cryptocurrencies.

(Reporting by Wayne Cole and Medha Singh; Editing by Saad Sayeed and Susan Fenton)