January 3, 2017 / 9:06 AM / a year ago

FOREX-Dollar back on trend, hits 2-week high vs yen

* Euro dips 0.2 percent to $1.0431 after Friday’s spike

* Expectations of Trump tax cut, higher rates boost dollar

* Aussie up on firm Caixin survey

By Patrick Graham

LONDON, Jan 3 (Reuters) - The U.S. dollar racked up its biggest rise in two weeks in 2017’s first full day of European trading on Tuesday, as dealers and investors in London returned to push the greenback to within 1 percent of December’s long-term highs.

One of January’s big question-marks, China’s yuan, was also proving more stable in its more freely traded offshore markets, a bullish survey of manufacturing purchasing managers helping it 0.1 percent higher and also supporting the Australian dollar.

A bout of year-end profit-taking had halted progress in the index used to measure the U.S. currency’s strength against a basket of its peers and weakened it to as much as $1.07 per euro.

It rose 0.6 percent on the day on Tuesday to trade at 102.87 against the index, compared to a 14-year high of 103.65 hit on Dec. 20. It strengthened 0.2 percent to $1.0431 per euro and 0.4 percent to 118 yen, its highest in two weeks.

Analysts with some of Europe’s biggest banks argued for a resumption of the gains that have led the greenback sharply higher since elections in early November on expectations Donald Trump will provide a boost to public spending and growth.

“In the near term the market should probably pick up where it left off, we’re certainly seeing that in dollar-yen for example this morning,” said Barclays’ G10 currency strategist Hamish Pepper.

“The past fortnight wasn’t a period that materially changed the trend that was dominant into the end of the year and it is hard to see the data or the Fed minutes this week changing that.”

A holiday in Japan thinned trade in Asia, but the yuan gained 0.1 percent in offshore markets after the Caixin/Markit survey showed Chinese factory activity picked up more than expected in December, with output reaching a near six-year high.

The greenback has been on the rise since September, but its jet higher since Trump’s election has prompted speculation of an attack on parity with the euro.

Treasury yields have jumped in anticipation of more U.S. government borrowing and higher Federal Reserve interest rates at a time when central banks in the euro zone and Japan are working to keep their short-term yields in negative territory.

U.S. two-year debt pays 200 basis points (bps) more than German debt and 138 bps more than Japanese bonds.

“Following a period of consolidation between now and late January, we believe the USD will put on another 10 percent of gains over the next eighteen months,” said Richard Grace, chief currency strategist at CBA.

Grace argued that Trump’s proposed plans for a U.S. company tax cut could be particularly bullish for the dollar since it would likely encourage a wave of repatriation by domestic firms and demand for U.S. equities by foreign investors.

“We anticipate some twelve-to-eighteen months of USD strength, beginning when the Trump Administration gets its tax cuts through the Congress,” he added, citing late March as likely timing for passage. (Additional reporting by Wayne Cole in SYDNEY; Editing by Andrew Heavens)

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