By Rodrigo Campos
NEW YORK (Reuters) - The U.S. dollar hit an 11-month peak against a basket of currencies on Monday as the risk of faster U.S. inflation and wider budget deficits sent Treasury bond yields shooting higher.
Both the U.S. currency and yields pared some gains in afternoon trading, but continued to point to a new reality in financial markets on expectations of more spending and less regulation when U.S. President-elect Donald Trump takes office in January.
On Wall Street, the Dow Industrials set a record high, led by financial stocks, on bets on higher interest rates and looser consumer protections. Gains in broader indexes were capped by declines in the technology sector.
The dollar traded above the 100 level on an index of the U.S. currency against the world's other major currencies <.DXY>. The euro <EUR=> briefly touched its lowest versus the greenback since last December, while the yen <JPY=> was at its weakest since June.
The greenback has been romping ahead since Trump's win in the U.S. presidential election last week triggered a massive sell-off in Treasuries.
"A lot of the move with the dollar has to do with higher yields," said Christopher Vecchio, currency analyst at FXCM in New York. "It's a seismic moment for markets."
Trump's win also sparked expectations of similar victories in Europe in the coming months. Worries over a rising tide of nationalist sentiment and restrictions on trade across Europe put pressure on the euro, analysts said.
Yields on the U.S. 10-year Treasury notes climbed to their highest since December at 2.302 percent <US10YT=RR>, while 30-year paper climbed above 3.06 percent, also the highest since December. German 30-year yields touched their highest since March, above 1.06 percent, but gave up most of the day's rise.
Benchmark 10-year notes fell 39/32 in price to yield 2.2543 percent, from 2.118 percent on Friday.
The benchmark U.S. yield has risen nearly 40 basis points over the past three sessions and analysts said they see no end in sight for the overall move lower in bond prices and higher in yields.
"I think there’s more to go. I think we’ve topped out as far as the value of bonds," said Tom Simons, money market economist at Jefferies and Co.
"Trump is talking about running an extremely loose fiscal policy, higher spending and lower taxes, and his trade and immigration policies suggest that the labor market is going to get even tighter. All of that adds up to a pretty high inflation environment in the future."
Rising inflation hurts bond prices because it makes their future interest payments worth less.
The market has priced in a 79 percent chance of a 25 basis point rate increase at the upcoming Federal Reserve meeting, scheduled for next month.
WALL ST ENDS LITTLE CHANGED
Bank stocks were the leading force on Wall Street, with the S&P 500 bank index <.SPXBK> ending at its highest level since March 2008. However, a drop in the biggest tech companies, which also carry the largest market capitalizations, offset the gains and the S&P 500 ended flat.
Investors have been betting technology will look relatively less attractive if Trump lives up to his promise to review regulation in healthcare and financial sectors and to increase government spending on infrastructure to boost economic growth.
"If growth becomes more even and available, we may see a continuation of rotation into lower-valuation, more cyclical businesses and out of high-valuation growth stocks like technology," said James Abate, chief investment officer at Centre Asset Management in New York.
The Dow Jones industrial average <.DJI> rose 21.03 points, or 0.11 percent, to 18,868.69, the S&P 500 <.SPX> lost 0.25 point, or 0.01 percent, to 2,164.2 and the Nasdaq Composite <.IXIC> dropped 18.72 points, or 0.36 percent, to 5,218.40.
Emerging market stocks <.MSCIEF> fell 1.2 percent and hit their lowest since July and MSCI's gauge of stocks across the globe <.MIWD00000PUS> fell 0.4 percent.
By contrast, Japan's Nikkei <.N225> jumped 1.7 percent to its highest since February, boosted by the weaker yen.
In commodities, the strong U.S. dollar put pressure on gold, which fell for a third consecutive session despite its appeal as an inflation hedge. Copper rose 0.2 percent after earlier gaining as much as 3.4 percent <CMCU3>.
In the oil market, Brent rebounded from three-month lows after a report that OPEC members were seeking to resolve their differences on a deal to cut production ahead of a meeting later this month.
U.S. crude <CLc1> was up 0.8 percent at $43.75 a barrel and Brent <LCOc1> last traded at $44.75, flat on the day.
(Reporting by Rodrigo Campos, additional reporting by Dion Rabouin, Sinead Carew, Richard Leong and Scott Disavino; Editing by Nick Zieminski and Dan Grebler)