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Dollar Rebounds, Europe Tracks Asia Gains

The US Dollar Index recovered from an earlier loss to extend Monday’s gain, while European equities advanced after Asian markets and crude oil rose on the first full trading day of the New Year. A private factory gauge indicated strength in China’s economy.

The dollar was at its strongest against the yen since Dec. 21 and highest versus the Turkish lira in a month. However, it remained weaker against currencies including the Australian and New Zealand dollars and the British pound. Australia’s benchmark index touched the highest level in 1 1/2 years and the Shanghai Composite Index gained for a second day. Oil traded above $54 a barrel as OPEC member Kuwait cut output and gold advanced for a fifth time in six sessions. The yield on 10-year U.S. Treasuries rose 3 basis points to 2.479%.

Reports on Sunday showed China’s official factory gauge stabilized near a post-2012 high while services remained robust, capping a year of steady improvement in both indicators. A private factory gauge released Tuesday also came in better than anticipated. Swaps contracts show the Federal Reserve is expected to raise interest rates twice this year, after increasing them once in each of the past two years.

“A year ago, the Chinese markets kept everyone on their toes; a year later, the outlook certainly appears to be more optimistic though we may have to bring back the catchphrase of ‘cautious optimism’ going into the new year as we search for clarity,” said Jingyi Pan, a market strategist at IG Asia Pte.

Key U.S. reports this week should provide further evidence if the world’s largest economy is strong enough to withstand higher borrowing costs. The Bloomberg Dollar index, which rose 0.4% Tuesday, closed 2016 with its strongest quarterly rally since 2008 as 10-year Treasuries offered the highest yields since 1999 relative to Group-of-Seven peers.

“I still think we have a firm dollar-strength trend in place, however I am wary of a New Year rally for riskier assets, especially the Aussie,” said Hugh Killen, Sydney-based head of foreign exchange, fixed income and commodities trading at Westpac Banking Corp., Australia’s second-biggest lender. “The Trump reflation trade has been so powerful, but I think we need to hold off now until the inauguration when we may get a better idea of what his presidency will really look like.”

(Source: Bloomberg)