Global markets are engaged in a massive re-pricing in the wake of Donald Trump’s election to the U.S. presidency. While the S&P 500 is again trading near a record high after rallying strongly on the belief that Mr. Trump will lower taxes, raze regulations, and make economic growth great again, currency and bond markets are moving in dangerous directions that cast shadows over the post-election ebullience.
The U.S. Dollar Index (DXY) ended the week at a one-year high of 101.21 as the euro (1.06) and yen (110.91) weakened significantly (these two currencies are the two largest components of the index).
But emerging market currencies are suffering much sharper losses against the dollar, which will cause big problems as these economies have to refinance nearly $10 trillion of dollar-denominated corporate and sovereign debt in the years ahead.
The dollar is reacting in part to rising U.S. interest rates. The yield on the benchmark 10-year Treasury continued its ascent last week, closing at 2.34% (nearly 1% higher than its post-Brexit low) while the yield on 30-year Treasuries closed above 3% at 3.026%. Bonds are toxic securities that should be avoided at all costs.
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