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Deepening US political controversy stalks markets

Investors were retreating to the sidelines on Wednesday and seeking havens on concerns that President Donald Trump’s ability to push through his pro-growth policies will be sidelined by deepening political controversy.

Reports that Mr Trump sought to interfere in an FBI investigation is the latest controversy to ensnare the White House, damping global risk appetite and causing some investors to seek the perceived safety of government bonds, gold and the Japanese yen.

“The US dollar has now fully reversed all the initial gains following the election victory for President Trump, providing further evidence of the ongoing loss of confidence in the Trump administration’s ability to materially boost US growth,” said Lee Hardman, currency analyst at MUFG.

The dollar index, which tracks the greenback against a basket of its peers, is down 0.2 per cent to 97.95, its weakest since mid-November. It rose to a 14-year high of 103.82 in the aftermath of Mr Trump’s election victory as investors made bets that his presidency could boost the world’s biggest economy and encourage the Federal Reserve to tighten monetary policy at a faster pace.

Stephen Gallo, European head of FX strategy at Bank of Montreal, pointed out that a stronger euro was the main driving force of the fall in the dollar index, since it “has far and away the biggest weighting” in it.

“I am sceptical about the ability of these Trump headlines to severely weaken the dollar from here on a broad trade-weighted basis, and of their ability to have a meaningful impact policy at the Federal Reserve.”

Meanwhile, improving corporate earnings have helped propel the US stock market to record levels this week, with the S&P 500 on Tuesday hitting an intraday high of 2,405.8. However, futures indicate the Wall Street equity barometer will slip 16 points to 2,384 when trading gets under way later in New York.

US government bonds remain a supposed haven, even when it is the US government that is the source of market angst. Consequently, the 10-year Treasury yield, which moves opposite to the bond price, is down 3 basis points to 2.30 per cent.

The Japanese yen is among the main currency beneficiaries of the dollar’s woes, strengthening 0.7 per cent to ¥112.35 per buck — its firmest level in nine days.