Dollar index hits 14-year high, pullback expected

NEW YORK (Reuters) - The dollar climbed to a near 14-year high against a basket of currencies on Wednesday, even as analysts cautioned the greenback is vulnerable to a letdown from its surge tied to bets on pro-growth policies under U.S. President-elect Donald Trump.

An employee of a money changer holds a stack of U.S. Dollar notes before giving it to a customer in Jakarta, October 8, 2015. REUTERS/Beawiharta

The euro deteriorated to its weakest level in almost a year against the greenback. Trump’s stunning victory on Nov. 8 has raised concerns about a rising tide of potentially destabilising wins for populist candidates and issues on ballots across Europe in the coming year.

“The market has gone a bit too far ahead of itself. It looks vulnerable for a short-term pullback,” said Mazen Issa, senior currency strategist at TD Securities in New York.

Weaker-than-forecast data on U.S. producer prices and industrial production on Wednesday pinned Treasury yields near their 10-month peaks and put a cap on the dollar.

Two-year Treasury yield was little changed at 1.005 percent, while 10-year yield was down 1.5 basis points at 2.223 percent.

The dollar index reached 100.57, which was its highest since April 2003 before retreating to 100.42, up 0.2 percent on the day. It has risen 3.5 percent over eight days, which would be the biggest such increase since May 2015.

While traders have increased their expectations on the Federal Reserve raising interest rates at its Dec. 13-14 policy meeting, the dollar rally may cause Fed policy-makers to reconsider such a move because of its repercussions on U.S. exports, analysts said.

“It’s reaching its limit. It could feed back negatively on U.S. growth,” Joachim Fels, global economic adviser at Pimco, said at the Reuters Global Investment Outlook Summit in New York.

On Thursday, Fed Chair Janet Yellen will testify before the Congress’ Joint Economic Committee at 10 a.m. EST (1500 GMT) where she might raise concerns about the dollar’s surge. [FED/DIARY]

“Anything (Yellen says) that expresses caution won’t be taken lightly by markets,” TD’s Issa said.

U.S. interest rates futures implied traders saw about a 91 percent chance the Fed would raise the target range on policy rates to 0.50-0.75 percent next month, CME Group’s FedWatch showed.

Pressured by traders’ conviction on a U.S. rate hike and political worries about Europe, the euro fell below $1.07 for the first time since the start of December 2015. It was down 0.4 percent at $1.0679.

The dollar ended little changed at 109.15 yen after rising to 109.75 yen, its highest since June 1.

Additional reporting by Patrick Kelly, Jemima Kelly in London; Editing by Tom Brown and Grant McCool