Global Markets: Dollar slides on U.S. Mnuchin remarks, booming Europe

By Abhinav Ramnarayan

LONDON (Reuters) - The U.S. dollar hit new lows on Wednesday after U.S. Treasury Secretary Steven Mnuchin said he welcomed its weakness and figures showed that the euro zone economy started the year at its strongest pace in over a decade.

Fear of protectionism from the U.S. economy, the world's largest, had already pushed the greenback to a three-year low, but Mnuchin's remark at the annual Davos summit of business and political leaders pushed it down further.

It was down half a percent against a basket of currencies in European trade.

Meanwhile euro zone businesses enjoyed a much better start to 2018 than anyone polled by Reuters expected, ramping up activity at the fastest rate since the middle of 2006, a survey showed on Wednesday.

The euro touched a three-year high of $1.2356, the dollar fell below 110.00 yen for the first time since September and hit new three-year lows on a trade-weighted basis, while sterling was at its highest level against the greenback since the Brexit referendum vote in June 2016.

U.S. President Donald Trump is due to speak Friday at the World Economic Forum in Davos, Switzerland, and investors are concerned he will use the speech to signal a more protectionist policy stance.

"It looks as if U.S. politics are indeed affecting the currency market, especially as they start to affect trade policy," said Marshall Gittler, chief strategist at ACLS Global, pointing to recently-introduced import tariffs as an example.

Trump slapped steep tariffs on imported washing machines and solar panels on Monday, giving a boost to Whirlpool Corp and dealing a setback to the renewable energy industry in the first of several potential trade restrictions.

Fresh signs of growth elsewhere in the developed world provided compelling alternatives for investors worried about the greenback.

Japan's exports to China and Asia hit record levels as shipments rose for a 13th straight month in December and manufacturing growth hit a four-year high in January, pointing to an economy that powered through the fourth quarter and into 2018.

The euro surge, meanwhile, comes ahead of Thursday's European Central Bank meeting, which is in focus following recent commentary that the central bank could change its policy guidance early this year.

This after the euro zone's economy outpaced that of the U.S. in 2017 and shows further signs of strength in the New Year.

In a strong sign of the positive sentiment towards the region, Spain generated over 40 billion euros of demand in a sale of 10-year government bonds on Tuesday in what is likely one of the largest order books in Europe ever.

Most low-rated "peripheral" euro zone government bond yields are now trading at their lowest level against benchmark German peers for months and in some cases years; another sign of confidence in the region.

Most emerging market currencies climbed on Wednesday, with the yuan and South Africa's rand both touching a more than two-year high as the dollar extended its weakest run since 2010-11.

STOCKS DIVIDED

MSCI's world equity index, which tracks shares in 47 countries, hit new highs in a continuation of a long running theme but on Wednesday it was a bit more of a mixed picture.

Wall Street scaled new heights overnight on the back of U.S. President Donald Trump's tax cuts, which will see J.P. Morgan implement a $20 billion investment plan.

Stock futures pointed to another higher open on Wedneday, up 0.18 percent in European trade.

But MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS eased 0.2 percent, having jumped 1.2 percent on Tuesday to an all-time peak.

European shares were also mixed, with a decline in utility stocks and tumbling tech stocks on fresh Apple worries weighing although a strong update from Novartis provided support.

The British pound also powered above $1.41, its highest since the vote to leave the European Union in June 2016, aided by the weak dollar and optimism around Britain's chances of securing a favourable Brexit deal.

The dollar's decline has been a boon to commodities priced in the currency, with gold edging up to $1,341.81 an ounce.

Oil prices were somewhat more subdued after jumping more than 1 percent on Tuesday when Brent crude hit $70 a barrel for the first time in a week.

Brent futures was down 7 cents at $69.89, still not far off the three-year high of $70.37 reached on Jan. 15, while U.S. crude was higher 20 cents to $64.67 a barrel.

(Additional reporting by Wayne Cole in SYDNEY and Marc Jones in LONDON; Editing by Mark Heinrich)