* Dollar/yuan falls sharply, dragging dollar broadly lower
* Some see "Trump rally" ending, others expect longer leg
* Graphic: World FX rates in 2016 tmsnrt.rs/2egbfVh
By Patrick Graham
LONDON, Jan 5 Some of the biggest gains on
record for China's yuan sent currency markets spinning on
Thursday, driving the dollar broadly lower and threatening to
quash one of the central bets of global investors for 2017.
A rise in overnight borrowing costs in Hong Kong to 96
percent helped the yuan rack up the biggest two-day rise for the
offshore version of its currency since its launch in 2010.
That in turn triggered a broader round of profit-taking on
the dollar, sending it more than 1 percent lower against the yen
and past $1.05 per euro.
A year after a tussle between Beijing and hedge funds
betting against the currency, many major asset managers and
banks have called for the yuan to fall in 2017 and dealers said
the moves had the potential to squeeze many players out of those
positions just five days into January.
In morning trade in Europe, the yuan was just under 1
percent higher on the day against the dollar at 6.8125,
almost 3 percent above lows hit on Tuesday.
"They have kickstarted a move that has washed out short-term
speculative money," currency fund Millennium Global's co-head of
portfolio management, Richard Benson, said.
"This isn't economics. China desperately doesn't want a
repeat of what happened this time last year (and it seems)
attack is the best part of defence."
Many banks and investors have also lined up bets on a
broadly stronger dollar in the year ahead, trusting that a
Donald Trump White House will raise public spending, spur
inflation and encourage repatriation of corporate funds held
But the dollar's failure to move closer to parity with the
euro, or 120 yen, since mid-December has fuelled doubts about
its ability to gain further, at least before Trump's
"The Trump bears kept quiet in December because there was no
point in fighting the battle then. They seem to be emerging
now," Benson said. "It is not just against the yuan. It looks to
me highly suspicious that dollar can't get below $1.0375 (per
The dollar's index against a basket of six major currencies
slipped to as low as 101.86, a three-week low,
just two days after it had hit a 14-year high of 103.82 on
Tuesday, when a strong reading from a U.S. manufacturing survey
boosted the greenback.
The euro rose as much as 0.7 percent in Asia to
$1.0563. It trimmed those gains to 0.3 percent early in European
trading and was 0.8 percent weaker at 116.32 yen.
"Some people say the 'Trump rally' has come to an end
already. Others say the real rally will begin after he takes
office," Societe Generale director of forex, Kyosuke Suzuki,
said. "It's not clear what the market's next theme will be."
U.S. bond yields edged down on Wednesday, with the 30-year
yield hitting a four-week low, even as the minutes from the
Federal Reserve's December policy meeting showed almost all
policymakers thought the economy could grow more quickly because
of fiscal stimulus under the Trump administration.
"Recent economic data is pretty good so markets are on
risk-on mode overall and the dollar is supported. But U.S. bond
yields are being capped so the dollar is losing its drive for
further gains," Daiwa Securities currency strategist, Yukio
For Reuters new Live Markets blog on European and UK stock
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(Additional reporting by Hideyuki Sano; Editing by Louise