Oil Stocks- Dollar boosted by Fed’s shift in tone
The dollar was heading for its largest two-day gain of the year after US central bank officials brought forward the anticipated timing of the Federal Reserve’s first post-pandemic interest rate rise.
The dollar index, which measures its value against a basket of other major currencies, jumped 0.7 per cent after gaining almost 0.6 per cent on Wednesday. The euro lost 0.5 per cent against the dollar to $1.193, taking the US currency’s gain over its eurozone counterpart to 1.5 per cent over two trading sessions.
The Federal Reserve said on Wednesday that most of its officials expected a rate rise in 2023, against earlier predictions of 2024, as the US economy recovered strongly from the pandemic and consumer price inflation hit an annual rate of 5 per cent in May. In a widely expected move, Fed chair Jay Powell also said the world’s most influential central bank was “talking about talking about” reducing the Fed’s $120bn-a-month asset purchases that have boosted financial markets since March 2020.
“The dollar reaction has been disproportionate,” said Brian Nick, chief investment strategist at asset manager Nuveen. “I feel there was just a lot of money behind that trade waiting for a trigger,” he added, after the dollar index had barely moved for weeks as traders waited on interest rate clues.
Investors largely expect the Fed to begin discussions on reducing support later this summer, with the focus shifting to further potential signals from global policymakers’ Jackson Hole summit in August. Brian Rose, chief economist at UBS Global Wealth Management, believes the central bank will give market participants “plenty of warning”, and seek to wrap up the so-called taper process before raising interest rates.
Stock markets stayed near recent all-time highs as investors focused more on the US central bank having raised its outlook for economic growth.
Wall Street’s blue-chip S&P 500 share index was flat in early New York dealings after falling 0.5 per cent on Wednesday. The technology-focused Nasdaq Composite index rose 0.3 per cent. The Stoxx Europe 600 was also flat.
But the change in Fed policymakers’ rate rise projections also jolted the US Treasury market on Wednesday, prompting follow-on falls in European government bonds in the next session.
The yield on the benchmark 10-year Treasury note jumped 0.09 percentage points on Wednesday evening to 1.58 per cent following the US central bank’s statement, reflecting a drop in prices. But it moderated slightly in European trading hours to 1.557 per cent.
European bond yields rose on Thursday as traders bet on other central banks following the Fed to rein in their crisis-era stimulus spending. The UK’s 10-year gilt yield jumped 0.07 percentage points to 0.828 per cent. Germany’s equivalent Bund yield added 0.03 percentage points to minus 0.164 per cent.
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Stock market reactions were muted, analysts said, because equity investors were confident that improved US economic growth would lift companies’ earnings.
The next US rate rise “will be happening at a time when the [global] economy is able to stand on its feet”, said Zehrid Osmani, manager of Martin Currie’s global portfolio trust.
If Fed officials had stuck to expecting the next rate rise as late as 2024, Osmani added, “there would be more to worry about as we could be at risk of [the US economy] overheating”.
Juliette Cohen, strategist at CPR Asset Management, warned equity investors were exhibiting “complacency” about inflation, which could erode companies’ earnings if they were unable to pass higher input costs on to their customers. If companies highlighted such problems in their upcoming second-quarter earning statements, Cohen said, “the positive mood in equity markets . . . will come into question”.