Dollar drop as Trump caution outweighs China GDP boost

Investors take shelter in gold as markets await direction of inauguration speech

Amid nervousness about Trump’s presidency, investors took shelter in gold

Caution prevailed in financial markets on Friday ahead of US president-elect Donald Trump's inauguration, even as China's economic growth beat expectations and Federal Reserve Chair Janet Yellen toned down her earlier hawkish policy stance.

European markets were headed for a subdued start amid trepidation over Trump’s first speech as president. Financial spreadbetter CMC Markets expected Britain’s FTSE 100 to open 0.1 per cent higher, and Germany’s DAX and France’s CAC 40 to start the day little changed.

MSCI’s broadest index of Asia-Pacific shares outside Japan retreated 0.2 per cent, and looked set to end the week flat.

Japan’s Nikkei reversed earlier losses to close 0.3 per cent higher, posting a 1.1 per cent weekly loss.


China’s fourth-quarter gross domestic product growth came in at 6.8 per cent, versus forecasts of 6.7 per cent, supported by higher government spending and record bank lending.

The economy expanded 6.7 per cent in 2016, in line with forecasts.

The data helped lift China’s CSI 300 index 0.8 per cent, setting it on course for a 1 per cent weekly gain.

Despite the headline growth, concerns are growing about whether Beijing can contain the financial risks from an explosive expansion in debt fuelled by years of government stimulus spending. A cooling housing market and painful structural reforms, as well as pressure on exports if Trump fulfils his protectionist promises, are also risks for China in 2017.

"On the domestic front, China needs to find a balance between chasing growth and deflating asset bubbles," said Zhou Hao, emerging markets economist at Commerzbank in Singapore.

“It makes sense for China to tolerate a growth moderation in the coming year, while leaving more flexibility to structural reforms,” he said, adding he expects China to lower its growth target to around 6.5 per cent.

The dollar inched down after Yellen said that gradual monetary adjustments were prudent, although she warned against letting the economy run hot. Her statement was seen as slightly less aggressive than a Wednesday speech in which she cautioned that waiting too long to raise rates could lead to “too much inflation, financial instability, or both,” amid comments by other Fed officials that also favoured faster hikes.

The dollar index, which tracks it against a basket of six major global peers, pulled back 0.2 per cent to 100.97 on Friday. On Thursday, it initially surged on upbeat US data pointing to brightening economic prospects, before closing 0.2 per cent higher as concern about Trump’s policies returned. The dollar slipped 0.2 per cent to 114.64 yen.

US homebuilding rebounded sharply in December amid stronger demand for rental housing, and the number of Americans filing for unemployment benefits fell to near the 43-year low touched in mid-November.

“The dollar could fall if Trump pushes forward his protectionist rhetoric in his inauguration speech,” said Minori Uchida, chief FX analyst at Bank of Tokyo Mitsubishi UFJ. “Some investors also expect more details on his policies, so the dollar could also slip if Trump does not mention any specifics.”

The 10-year US Treasury yield fell 0.4 per cent to 2.4613, after spiking to a high of 2.496 on Thursday.

US stocks were also restrained overnight, with the major indexes posting losses of as much as 0.4 per cent, and the Dow Jones Industrial Average down for its fourth straight session.

The euro rose on Friday, extending gains following initial losses after European Central Bank chief Mario Draghi played down a recent rise in euro zone inflation, as investors parsed his statement and noted no changes to policy. The common currency advanced 0.2 per cent on Friday to $1.068.

In commodities, oil rose on expectations of tighter supply and reports of record Chinese demand, but the gains were tempered by concerns about swelling US inventories.

US crude added 0.3 per cent to $51.53 per barrel, pulling further away from Wednesday’s one-week low. But it remains down 1.6 per cent for the week.

Global benchmark Brent advanced 0.3 per cent to $54.32, shrinking its weekly loss to 2 per cent.

Amid nervousness about Trump’s presidency, investors took shelter in gold. Spot gold extended gains 0.2 per cent to $1,207.06 an ounce, set for a weekly increase of 0.7 per cent, its fourth straight week of gains.