FOREX-Dollar wallows near 7-week lows on fading Trump trade

Reuters

(Recasts after start of European trading, adds quote, updates dateline from previous TOKYO)

* Trump formally withdraws America from TPP trade pact

* Dollar index wallows near 7-week lows

* Tumble in U.S. Treasury yields undermines dollar

* Graphic: World FX rates in 2017 http://tmsnrt.rs/2egbfVh

By Jemima Kelly

LONDON, Jan 24 (Reuters) - The dollar wallowed near its lowest levels since early December on Tuesday, kept under pressure by concerns that U.S. President Donald Trump was focusing more on protectionism and less on pro-growth economic policies.

The currency had soared over 6 percent to 14-year highs in the eight weeks following Trump's surprise election victory in November, as investors bet his promised infrastructure spending and tax cuts would boost growth and inflation, leading to a faster pace of U.S. interest rate rises and a stronger dollar.

But Trump's first news conference since winning the election and his "America First" inaugural speech offered scant detail on his planned fiscal stimulus and fuelled concerns that Trump's protectionism could harm the U.S. economy.

The fading of the so-called "Trumpflation trade" has driven a 3.5 percent fall in the dollar against a basket of major currencies in the past three weeks.

The euro, which had looked like it was heading toward parity with the dollar at the end of 2016, has rebounded above $1.07 and hit seven-week highs of $1.0774 in early Asian trading, though by 0830 GMT it was 0.2 percent down on the day at $1.0745.

Trump formally withdrew the United States from the Pacific Rim Trans-Pacific Partnership (TPP) on Monday, distancing the United States from its Asian allies.

"There's a lot of negative news and not really pro-growth positive news. So markets are just pricing out this Trump trade a little bit, and that hurts the dollar," said UBS's global head of currency strategy, Constantin Bolz, in Zurich.

"If his rhetoric continues as it has done over the last few days and weeks, the dollar could easily lose another few percent."

Lower U.S. Treasury yields also undermined the dollar. The benchmark 10-year yield on Monday posted its biggest one-day drop in more than two weeks as concerns about the fallout of Trump's tough stance on trade spurred safe-haven demand for bonds.

Against the traditionally safe-haven yen, the dollar climbed half a percent to 113.355, having notched a low of 112.52 earlier in the session, its weakest since Nov. 30, and well below its overnight high of 114.45.

Trump's nominee for Treasury Secretary Steven Mnuchin was quoted by Bloomberg on Monday as saying that an excessively strong dollar was negative in the short term, which put additional pressure on the dollar.

Also adding to investors' risk-averse mood, the Trump administration vowed on Monday that the United States would prevent China from taking over territory in international waters in the South China Sea, something Chinese state media has warned would require Washington to "wage war".

"(The market) is now just watching and waiting, with headline risk, to see Trump's first 100 days as we get greater clarity around his policies and around his cabinet. All of these are likely to inject greater volatility into the market," said Sue Trinh, head of Asia FX strategy at Royal Bank of Canada in Hong Kong.

Sterling slipped 0.3 percent ahead of a UK Supreme Court ruling that is expected to say the government needs parliamentary approval to trigger formal talks about the country's exit from the European Union.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets (Additional reporting by Tokyo markets team Editing by Jeremy Gaunt)