Dollar surges as Fed talk boosts Treasury yields

LONDON: The dollar soared as U.S. Treasury yields hit their highest in almost 12 weeks, while Spanish borrowing costs rose and stocks fell as a police crackdown on a unilateral independence vote in Catalonia rattled investors.

Firming expectations the U.S. Federal Reserve will raise interest rates for a third time this year, data pointing to steady growth in the world's largest economy and talk of a potentially more hawkish successor to Fed Chair Janet Yellen combined to push Treasury yields higher.

Ten-year yields topped 2.37 percent, their highest since mid-July, pushing the dollar half a percent higher against a basket of currencies.

"The dollar is stronger on higher Treasuries, and the market is seeming to play the idea that the Fed might become more hawkish when we look at the possible candidates for the board of directors," said Antje Praefcke, FX strategist at Commerzbank.

The euro fell 0.6 percent to $1.1738, though traders said the Catalan referendum had only a limited impact on the single currency.

But in Spain, the IBEX stocks index fell 1.3 percent in early trade while the pan-European STOXX 600 index rose 0.2 percent.

Banco de Sabadell and Caixabank, both based in Catalonia, fell 2.6 and 1.9 percent respectively.

Spanish 10-year government bond yields rose as much as 7 basis points to 1.69 percent, taking the gap between them and German benchmarks close to its widest in nearly four months.

Catalan officials said 90 percent of voters in Sunday's ballot favoured secession, raising the possibility of a unilateral declaration of independence in the wealthy region.

"Whether independence will actually happen remains unclear. What is clear is that Spain has entered a deep political crisis," ING's global head of debt and rates strategy, Padhraic Garvey, said.

Asian shares rose after upbeat economic data from China and Japan. MSCI's broadest index of Asia-Pacific shares outside Japan added 0.2 percent.

Japan's Nikkei closed up 0.2 percent after a survey showed the mood among big manufacturers was its best in a decade.

China's manufacturing activity grew at its fastest pace since 2012 last month. The official Purchasing Managers' Index released on Saturday rose to 52.4 from 51.7 in August.

Chinese markets were closed for a week-long holiday.

The Japanese yen fell half a percent to 113.02 per dollar  while sterling fell 0.6 percent to $1.3325.

The dollar has been on a roll since Fed chief Yellen said last week it would be "imprudent" to keep monetary policy on hold until U.S. inflation picked up to 2 percent.

HAWKISH

Speculation that President Donald Trump might choose former Fed Governor Kevin Warsh, who is considered more hawkish than Yellen, to replace her as head of the central bank also boosted the dollar.

The dollar notched up its best weekly performance of 2017 last week, lifted also by a revival of the "Trumpflation" trade on expectations Trump would deliver a stalled tax reform plan.

Oil prices fell after a Reuters survey found output from the Organization of the Petroleum Exporting Countries (OPEC) rose by 50,000 barrels a day last month.

Brent crude, the international benchmark, fell 40 cents a barrel to $56.39.

The strong dollar helped drag gold down to its lowest in almost seven weeks. The precious metal fell 0.6 percnet to $1,272 an ounce.