LONDON, Nov 19 (Reuters) - Investment bank Goldman Sachs tipped a higher dollar as its top trade for 2016 on Thursday, heading a list that also bet on rising U.S. inflation and recommended buying long-dated Italian bonds over German bonds.
The long-term dollar bull reiterated its buy recommendation versus the euro and Japanese yen saying improvements in the U.S. labour market and resilience in domestic demand would drive up interest rates faster than the market is currently discounting.
Related to this, Goldman also said it expected U.S. inflation to accelerate through next year and recommended buying 10-year 'break-evens', a yield spread trade that is designed to profit when inflation is rising.
It said increased bond buying from the European Central Bank would be more of a boost for longer-term Italian bonds than their German peers and see the gap in the 10-year yields narrow by around 30 basis points to 75 basis points. (Reporting by Marc Jones and Jamie McGeever)