Yellen lifts dollar as global markets await Trump tax plan

By Nigel Stephenson Markets Reuters

Federal Reserve Chair Janet Yellen speaks on stage as part of a conversation put on by the Gerald R. Ford School of Public Policy at the University of Michigan's Rackham Auditorium in Ann Arbor, Mich., on Monday, April 10, 2017. (Melanie Maxwell /The ... Ann Arbor News via AP) (Melanie Maxwell /The Ann Arbor News via AP)

LONDON (Reuters) - Growing expectations that the U.S. Federal Reserve will raise interest rates for the third time this year lifted the dollar on Wednesday, and European share prices rose as President Donald Trump's administration prepared to outline a new tax plan.

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The dollar rose half a percent to a one-month high against a basket of currencies and yields on interest rate-sensitive two-year U.S. Treasury yields touched their highest since 2008 after Fed Chair Janet Yellen said on Tuesday it would be "imprudent" to keep rates on hold until U.S. inflation hit 2 percent.

Ten-year yields climbed seven basis points to an eight-week high of 2.30 percent, also pushed higher by the prospect of tax cuts that could increase federal borrowing, analysts said.

Wall Street looked set to open modestly higher, index futures showed.

Markets are pricing in a more than 80 percent chance the Fed will raise borrowing costs in December, according to the CME Group's FedWatch tool, up from 72 percent a week ago. Several other senior Fed officials are scheduled to speak on Wednesday.

"Yellen's comments gave more certainty about another rate hike by the end of the year," said DZ Bank rates strategist Daniel Lenz.

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"Further details of Trump's tax plans and whether this proceeds smoothly will be of interest -- it should be a boost to the economy and mean a generally higher bond yield environment."

On the eve of its unveiling, Trump said lawmakers should expect a "very, very powerful document" that would cut taxes "tremendously" for the middle class.

If passed, the plan would be Trump's first significant legislative win since taking office in January.

"The idea that Trump could be reaching across the aisle, talking about tax cuts to middle and low income households, if it comes to pass, we are talking a pretty material fiscal boost to the U.S. economy. This sort of easy fiscal policy is why the markets are reacting the way they have,” said Mark Dowding, co-head of investment grade at BlueBay Asset Management.

Anticipation of the long-awaited plan helped lift shares in Asia, while a weaker euro pushed European equities higher. A weaker currency is a boon to exporters.

An index of European banks rose 1.5 percent as the pan-European STOXX 600 share index rose 0.3 percent to a 10-week high.

Cyclical sectors that had surged on the prospect of "Trumpflation" resulting from the president's pro-growth campaign pledges were the day's top gainers, with miners up 0.9 percent.

MSCI's broadest index of Asia-Pacific shares outside Japan dipped 0.1 percent.

Tokyo shares closed down 0.3 percent

In currency markets, the euro fell 0.4 percent to a one-month low below $1.1750. The single currency traded close to $1.21 earlier this month but was rattled by Sunday's German election, which brought the far-right Alternative for Germany (AfD) party into parliament.

The yen fell 0.5 percent to 112.82 per dollar and sterling lost 0.3 percent to $1.3420 against the resurgent greenback, picking up from as low as $1.3363.

Euro zone government bond yields followed Treasury yields higher. German 10-year benchmark yields rose 6 basis points to 0.47 percent.

OIL AND METALS

Brent crude oil fell as much as 1 percent on the strong dollar and a report of a possible increase in Nigerian exports but held not far from Tuesday's 26-month high.

Brent, the international benchmark oil price, fell as far as $57.83 a barrel, having hit $59.49 on Tuesday.

Copper rose for the first day in six as traders closed positions before the quarter-end and a holiday in China. The industrial metal rose 1.1 percent to $6,485 a ton.

"You see not only that demand in China is doing well, but also that in the longer term demand will increase even more from other sectors, like the electric vehicle industry. At this stage the fundamentals are very supportive of stronger prices," ABN Amro analyst Casper Burgering said.

Gold dipped 0.2 percent to $1,291 an ounce.

(Additional reporting by Swati Pandey in Sydney, Fergus Jensen in Jakarta and Dhara Ranasinghe, Helen Reid, Abhinav Ramnarayan and Jan Harvey in London; Editing by Catherine Evans and Hugh Lawson)

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