The dollar fell and US government bonds rallied after Donald Trump picked Scott Bessent to run the Treasury, a Wall Street veteran who investors expect will take the sting out of the administration's more aggressive trade and economic policy proposals.

A gauge of the greenback fell as much as 0.6% on Monday, its biggest decline in over two weeks, with the euro rebounding from the weakest level since 2022 reached last week. The yield on 10-year Treasuries fell as much as eight basis points to 4.32%, the lowest level since mid November.

Bessent, who runs macro hedge fund Key Square Group, has called for a gradual approach to implementing trade restrictions, and has appeared open to negotiating the exact size of tariffs championed by the president elect. In an interview with the Wall Street Journal, Bessent said his priority will be to deliver on Trump's various tax cut pledges, while also cutting spending and "maintaining the status of the dollar as the world's reserve currency."

"Bessent is seen as an antidote to Trump's most extreme economic views," said Kathleen Brooks, research director at XTB. 

The dollar notched its longest stretch of weekly advances in more than a year on Friday as the prospect of an all-out global trade war weighed on currencies across the world. Trump has threatened to hit Chinese shipments with a 60% tariff, and an impose a 10% levy tariff on goods from all other countries.

Bessent's nomination, which needs to be confirmed by the US Senate before he takes the job, is at odds with Trump's choices of a series of unorthodox candidates and absolute loyalists for other key positions. Other prominent contenders included former Federal Reserve board member Kevin Warsh and Trump transition co-chair Howard Lutnick, who had the support of Elon Musk. 

This "builds on the emerging narrative that the tail risks of a radical Trump policy departure have been overstated," said Richard Franulovich, head of FX strategy at Westpac Banking Corp. "Checks and balances can moderate Trump's radical policy proposals."

Still, the dollar's gain over the past eight weeks is unlikely to be erased fully. Speculative traders boosted their bets on dollar gains in the week ending Nov. 19 to the most bullish level since late June, according to data from the Commodity Futures Trading Commission.

Meanwhile, bond traders have dialed back expectations for Fed easing in 2025 amid fears inflation could accelerate in a robust US economy. Swaps are pricing just 68 basis points of rate cuts by the end of next year.

"The current reaction may lead to a short term correction in the US dollar should US yields move lower," said Felix Ryan, an analyst at ANZ Banking Group in Sydney. "But ultimately we still see fundamental dynamics — firm US growth, contrasted with weaker EU and global growth as highlighted in Friday's November PMI data — as still supporting the case for a well-supported US dollar."

Source : Bloomberg