Dollar drops after Trump-Comey revelations alarm investors

Investors have been shocked by the news and anxious Trump's ability to deliver on business-friendly policies.

"The political morass that has engulfed the Trump Administration is a major distraction", said BBH currency strategists in a note to clients, adding that investors were already concerned about the momentum of the US economy. The dollar bought Yen112.31, from Yen113.12 late Tuesday.

Taking their cue from the USA, stocks from Japan to Australia are in retreat, with the MSCI Asia Pacific Index dropping 0.4 per cent as energy producers and banks lead losses.

The uncertainty fanned a flight to safe assets, sending the yen and gold rallying, while the VIX gauge of volatility-also known as the fear index-soared nearly 50 percent. The U.S. economy is already into its third-longest expansion ever, and a recent fall in the U.S. economic surprises index suggests it is running out of steam.

Stocks fell sharply, however, in reaction to reports that the president asked former FBI director James Comey to drop the federal investigation into former national security adviser Michael Flynn's ties with Russian Federation.

"While there is no particular headline behind the move, a likely combination of slipping USA yields, softer oil prices and heightened political uncertainty in Washington are providing traders with this morning's toxic dollar elixir".

The British pound fell 0.25 per cent against the United States dollar, to US$1.2931, tumbling after what analysts said was likely a technical selloff.

Money markets have slashed the probability of the Federal Reserve raising rates next month to less than 60 per cent from over 90 per cent last week.

The losses came despite another record close in London and NY, though in early European trade Wednesday, London dipped 0.3 percent, Paris shed 0.6 percent and Frankfurt gave up 0.8 percent.

Trump has been accused of asking former Federal Bureau of Investigation chief James Comey - who he later sacked - to stop a probe into ex-national security advisor Michael Flynn and that he revealed classified information to Russian diplomats.

The developments intensified doubts that Trump would be able to follow through on his promises for tax cuts, deregulation and fiscal stimulus.

The dollar fell to fresh three-week lows against the safe haven yen, with USD/JPY down 0.35% to 110.43 having ended the previous session down 2.03%, the largest one day decline since July 29, 2016.

The Nasdaq had its worst day since June 24.

The Dow finished down 373 points at 20,606.93 for a drop of 1.8 percent - its biggest one-day decline since Trump was elected.

Optimism over pro-growth economic policies under Trump helped drive a sharp rally in US stocks after the November 8 USA election.

Benchmark 10-year notes last fell 1/32 in price to yield 2.2173 percent, from 2.216 percent late on Wednesday.

Spot gold hit US$1,263.02 an ounce, its highest since May 1.

The U.S. dollar reversed early losses against a basket of major currencies after new applications for U.S. jobless benefits unexpectedly fell last week and factory activity in the mid-Atlantic region accelerated sharply. South Korea's Kospi also extends its losses from geopolitical tremors from North Korea's nuclear exercise; it manages to shed 0.15% at 2291.53, or 3.52 points.

  • Zachary Reyes