Monday 26 February 2018

Dollar rise hits commodities as Fed talks of tightening

US Dollar
US Dollar

Wayne Cole

The dollar advanced for a fifth straight session on Thursday, pressuring commodities and Asian shares after yet another Federal Reserve official talked up the chance of more than one increase in US interest rates this year.

If the dollar can keep its footing going into the long Easter weekend it will notch up the first weekly gain in a month against a basket of major currencies.

The euro eased to $1.1172, leaving it well off last week's top of $1.1342. Sterling also slid to $1.4096 on concerns the attacks in Brussels would aid the campaign to leave the European Union in June's "Brexit" vote.

Equity investors tend to dislike any hint of tighter US policy and MSCI's broadest index of Asia-Pacific shares outside Japan slipped 1.0pc.

The resource-heavy Australian market lost 1.1pc and Shanghai 0.6pc.

Japan's Nikkei lost 0.6pc. Trading house Mitsui & Co dived 7.5pc after suffering its first ever loss as it was hit by big writedown on its copper and gas investments.

European equities were expected to open lower, with spreadbetting firm IG predicting Britain's FTSE 100 to open 0.7pc lower, Germany's DAX to fall 0.5pc, and France's CAC 40 to drop 28 0.6pc.

On Wall Street the Dow ended Wednesday with a loss of 0.45pc, while the S&P 500 eased 0.64pc and the Nasdaq 1.1pc.

St. Louis Fed President James Bullard joined a chorus of officials in highlighting the risk of at least two rate hikes this year, with the first perhaps as soon as April.

Markets imply only one increase and dealers suspect an orchestrated attempt by the Fed to shift that thinking.

Yet for all the Fed's chatter about multiple hikes, the market seemed far from convinced. Fed fund futures imply almost zero chance of a move in April and a rate of just 61.5 basis points by year end. The current effective funds rate is 37 basis points.

It was also notable that Treasury yields actually fell in response, with the 10-year back down at 1.88pc from a high of 1.95pc on Wednesday.

Still, the rise in the dollar sparked profit-taking in a range of commodities from oil to gold to copper.

Oil took a further knock when data showed crude stockpiles had risen by three times the amount expected in the latest week. US crude fell a further 6 cents to $39.73 a barrel, after sliding 4pc on Wednesday. Brent inched up 10 cents to $40.57.

"Oil is still the centre of attention for many markets. As their prices fall, markets are turning risk-off. We also should expect some correction given the fast pace of recovery in various asset markets," said Tohru Nishihama, senior economist at Dai-ichi Life Research Institute in Tokyo.

Gold was down at $1,216.80 an ounce, after hitting its lowest since late February at $1,214.70.


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