The U.S. dollar was broadly firm, hitting 9 1/2-month highs against the yen as oil prices surged after OPEC agreed to output cuts – lifting inflation expectations and U.S. bond yields.
Steven Mnuchin, President-elect Donald Trump’s pick to lead the U.S. Treasury, gave no hint of any unease at the strong dollar in his first remarks since being named for the job, giving traders fresh impetus to buy the U.S. currency.
The dollar’s index against a basket of six major currencies rose to 101.60, edging close to last week’s 102.05, which was its highest level since March 2003.
The dollar’s rebound came as oil prices jumped around 9 percent on Wednesday as OPEC members agreed to cut production, its first reduction since 2008.
The gains in oil prices stoked inflation expectations, which in turn sent U.S. Treasury yields higher given the negative impact of inflation on bond prices.
The higher Treasury yields fuelled demand for the dollar relative to currencies such as the euro and yen, whose government bond yields are still low-to-negative.
The dollar rose notably against the yen, surpassing last week’s peak of 113.90 to trade at 114.59 yen after hitting a nine-month high of 114.83 yen in late U.S. trade.
“I think it is just a matter of time that the dollar will test 115 yen after Mnuchin was silent about the dollar’s strength,” said Masafumi Yamamoto, chief currency strategist at Mizuho Securities.
Mnuchin said on Wednesday the administration would make tax reform and trade pact overhauls top priorities as he outlined Trump’s economic agenda along with Wilbur Ross, Trump’s nominee for commerce secretary.
“The good news is that they seem to be saying that no one will be tariffed up and no one will be named a currency manipulator on day 1,” Steven Englander, Global Head of G10 FX Strategy at CitiFX in New York, wrote in notes.
“They seem to be obliquely in favour of a strong dollar, emphasizing the capital account surplus and the jobs the capital inflow might create,” he added.
Strong U.S. data published on Wednesday also supported the dollar. The ADP National Employment Report data showed U.S. private employers added 216,000 jobs in November, well above economists’ expectations.
The ADP data was a good omen for Friday’s employment report and fuelled expectations that the Fed could raise interest rates twice next year after an almost certain rate hike later this month.
In contrast, the yen weakened broadly, given the Bank of Japan’s policy to control long-term bond yields.
The Australian dollar rose to 84.80 yen, its highest level in seven months.
The euro rose to 121.55 yen, its highest level since June 24, even though the currency was capped on the whole ahead of Italy’s referendum on Sunday, which could reject Prime Minister Matteo Renzi’s constitutional reforms, on which he has staked his political future.
His departure could destabilise Italy’s fragile banking system and be taken as another sign of rising anti-establishment sentiment in Europe, potentially eroding investor confidence in the currency union.
The euro fetched $1.0596, slipping back from Wednesday’s high of $1.0666.
The dollar also rose to a 10-month high of 1.0205 against the Swiss franc on Wednesday and last stood at 1.0160.