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Dollar Halts Charge As Bashed Bonds Steady

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Battered bonds and emerging market currencies enjoyed some respite on Thursday as the dollar took a breather from a post-U.S. election charge that has taken it to a 13-1/2 year high.

Europe’s main stock markets <0#.INDEXE> saw a subdued start as the dip in benchmark bond yields knocked banking stocks that have rallied since the rebound in yields has fueled optimism about lending profits. [.EU]

The dollar’s drop against other top world currencies was a modest 0.3 percent .DXY but marked a change of direction after eight days of back-to-back gains that have seen it jump almost 4 percent.

“The momentum of the Trump rally (in bond yields and the dollar) has faded a bit so we are all trying to recover,” said Rabobank strategist Philip Marey.

He said investors were trying to get a handle on what U.S. President-elect Donald Trump is likely to do when he takes office in January, as well as position for what now looks almost certain to be a U.S. interest rate rise next month.

“Today the interesting things are a speech from (Fed chair) Janet Yellen and whether there is anything new there. There’s also (U.S.) inflation data, so if they don’t have any negative surprises we are heading for a rate hike.”

For bond markets that have taken the brunt of the Trump trade, the most significant event overnight was the Bank of Japan's attempt to cap 10-year Japanese government bond yields and make good its recent promise to keep 10-year yields pinned to zero.

That had pushed the yen as low as 109.30 yen per dollar JPY= and the Japanese currency was barely budging at 109.00 by the time European trading was over the initial flurry. [FRX/]

More broadly, Japan’s efforts will raise questions about how far central banks such as the ECB and others will be willing to tolerate steep and sudden rises in government borrowing costs.

ECB is set to publish the minutes of its recent meeting later which will be scoured for clues on how Mario Draghi and his colleagues plan to go forward with their mass stimulus program next month.

The euro EUR= added 0.4 percent from Wednesday to stand at $1.0730 after setting an 11-month low of $1.0666 overnight.

Germany’s benchmark 10-year Bund yield DE10YT=TWEB fell almost 5 basis points to 0.26 percent, moving away from a peak of 0.396 percent hit on Monday — the highest level since late January. Other euro zone yields were 2-5 bps lower on the day.

“The BOJ’s move shows that there is a bit more of an effort to cap yields and knowing that, other bond markets can be more stable from here,” said Mizuho strategist Peter Chatwell.

The rout in U.S. bond prices also halted with Treasury yields US10YT=RR pulling back to 2.195 percent after touching an 11-month high above 2.3 percent earlier in the week.

Crude oil prices also eased as a bigger-than-expected U.S. crude inventory build outweighed hopes for a producers’ freeze on output following Russia’s comments about a possible meeting with Saudi Arabia. [O/R]

Brent crude was down 0.2 percent at $46.55 a barrel LCOc1.

Gold nudged up slightly as the dollar consolidated. Spot gold XAU= inched up 0.1 percent to $1,226.10 an ounce, moving further away from the five-month low of $1,211.08 set on Monday.

Gold had still lost roughly $100 an ounce from last Wednesday’s post-U.S. election high on the back of the sharp rise in bond yields and burgeoning appetite for risk. [GOL/]

Emerging markets, also been battered by the jump in the dollar and borrowing costs and the prospect of a major shake up in trade deals under Donald Trump, remained on edge.

The Malaysian ringgit hit a 10-month low on with increasing fears that authorities could introduce capital controls, while Mexico’s peso inched away from recent all-time lows ahead of what an expected interest rate hike later.

“The central bank needs to send a strong message,” said Carlos Serrano, an economist at BBVA Bancomer, who is expecting a 75-basis-point hike.