Dollar Extends Loss Amid Drone Concern, Oil Rises for Second Day 

• China seized U.S. drone in international waters in Asia
• Japan shares fall for first time in three days as yen gains

The dollar retreated versus most major peers, as heightened geopolitical tensions over China’s seizure of a U.S. naval drone added to reasons for traders to pull back amid the greenback’s strongest rally since 2008. Australian and New Zealand stock markets rose as U.S. equity futures rebounded.

Japanese shares declined as the yen led gains among major currencies after news that broke Friday on the confrontation drove up Treasuries. Contracts on U.S. indexes rose Monday. Crude oil gained, extending a climb from last week as an increase in maritime tensions could crimp deliveries. The offshore yuan jumped by the most in two weeks after the People’s Bank of China raised its fixing for the currency onshore. Australia’s currency reversed declines after the government forecast a slightly narrower deficit this fiscal year as it bids to stave off a credit rating downgrade.

Traders will be monitoring developments after U.S. President-elect Donald Trump lashed out at China over the weekend, while China’s Communist Party-affiliated Global Times mocked Trump’s demeanor as “lagging far behind the White House spokespersons.” The incident threatens to impede the momentum of what has been called the global reflation trade: gains in stocks and the dollar and a slide in bonds, spurred by prospects that Trump’s spending agenda will fuel inflation in the world’s biggest economy. Volumes are expected to thin in coming weeks before the December holiday season and end of the year, with the Bank of Japan’s policy decision on Tuesday the last Group of Seven central bank meeting for 2016.

“I can’t see the dollar index in a sustained rally — two rate hikes are priced into fed funds futures, and a lot of expectation is built into Trump’s policies,” said Janu Chan, a senior economist at St. George Bank Ltd. in Sydney. “On the other side of the equation, the ECB and BOJ are not likely to ramp up monetary stimulus anymore. Profit taking is most likely behind current U.S. dollar weakness, but it’s possible it’s also due to geopolitical concerns on the reports that China seized the U.S. drone.”

Stocks

• The Topix index of Japanese shares slid 0.3 percent as of 1:14 p.m. in Tokyo, snapping a two-day advance; the Kospi Index was little changed after an earlier decline
• China’s Shanghai Composite Index lost less than 0.1 percent while Hong Kong’s Hang Seng Index dropped 0.8 percent
• Australia’s S&P/ASX 200 Index climbed 0.7 percent and the New Zealand benchmark advanced 0.4 percent
• Futures on the S&P 500 Index rose 0.1 percent after the gauge fell 0.2 percent to 2,258 on Friday. The measure barely moved over the course of last week after rising to a record. The Dow added 0.4 percent in the five days, for its sixth straight weekly gain, the longest run in a year

Currencies

• The dollar declined 0.6 percent to 117.27 yen. The greenback retreated 0.1 percent to $1.0465 per euro. It reached $1.0367 on Thursday, its strongest level since January 2003
• Net long positions on the dollar rose by 11,897 contracts to 318,330 contracts in the week to Dec. 13, according to Commodity Futures Trading Commission data released Friday. That’s the highest level since Jan. 19
• The Bloomberg Dollar Spot Index has strengthened 7.1 percent this quarter, heading for its best rally since the three months ended Sept. 30, 2008
• The Australian dollar edged lower, buying 72.97 U.S. cents
• Malaysia’s ringgit declined 0.1 percent to touch 4.4792 per dollar, the weakest level since 1998, during the Asian financial crisis

Commodities

• West Texas Intermediate rose 1 percent to $52.40 a barrel, adding to Friday’s 2 percent rally
• Gold rose 0.3 percent to $1,137.82 an ounce, heading for a second day of gains

Source: Bloomberg

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