LONDON (Reuters) – The dollar charged to its highest in more than two years on Thursday, trampling almost everything in its way, after the Federal Reserve dampened hopes for a lengthy run of U.S. interest rate cuts.
A blizzard of data and events made for a hectic day. U.S.-China trade talks wound up without any real progress, factory activity contracted again across Asia and Europe and the Bank of England kept UK rates steady at 0.75% as expected.
But it was remarks from Fed Chair Jerome Powell that Wednesday’s first 25 basis point rate cut since the financial crisis was “not the beginning of a long series of rate cuts”, that set markets running.
The dollar’s reaction said it all. The DXY index surged to its highest in more than two years, euro/dollar dropped below $1.11 for the first time since May 2017, and Brexit-hobbled sterling hit 30-month lows just above $1.21. [/FRX]
World stocks had recoiled overnight too, with a seventh day of falls bringing up emerging market’s worst run in almost a year. Europe did manage to claw higher though thanks to its weaker currencies and relief for banks that the borrowing rates that heavily influence their margins might not plunge too much further.
“Markets interpreted the Fed’s communication as slightly hawkish and therefore further rate cuts in the immediate future were somewhat priced out,” said David Milleker, senior economic adviser at Union Investment. “And the dollar strengthened. All in all, the Fed did not achieve what it presumably wanted.”
U.S. Treasuries were sold off as investors scaled back their pre-Fed meeting expectations for at least 100 basis points of cuts in the near term. Yields on 10-year notes climbed as high as 2.058% in Europe from a U.S. close of 2.007%.
Core euro zone bond yields were rising, too, although -0.428% German Bund levels were still extraordinary. “I didn’t say it’s just one rate cut,” Powell had been careful to emphasize after Wednesday’s 25-basis-point move.
Instead, he characterized it as “a mid-cycle adjustment to policy”, citing signs of a global slowdown, U.S. trade tensions and a desire to boost inflation.
Wall Street fell afterwards but E-minis futures for the S&P 500 were pointing to a 0.15% higher restart later.
The turnaround by the Fed after nine rate hikes over the last few years has made it a golden last seven months for world stocks but particular the main U.S. indexes. The S&P 500, Dow and Nasdaq have surged 19%, 15% and 23% respectively.
World stocks enjoy stellar $8 trillion gain in 2019 –
MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.8%, extending losses for a fifth day to the lowest since mid-June and posting its biggest one-day percentage drop in a month.
Japan’s Nikkei rose, reversing early declines. Australian shares declined 0.4%. Losses by Chinese shares ended down 0.8%.
“We believe the Fed is trying to thread the needle, balancing market jitters about slowing global growth with robust consumer spending and a strong job market in the U.S.,” said Nick Maroutsos, co-head of global bonds at Janus Henderson.
“In other words, by cutting just 25 bps, the Fed is trying to bolster market confidence while also keeping some dry powder in reserve in case of an economic shock.”
Adding to worries, the United States and China on Wednesday ended a brief round of talks without much progress in ending their year-long trade war.
Downbeat data and factory surveys on Thursday had also pointed to further weakness for Asia and Europe’s trade-reliant economies.
Manufacturing activity in the euro zone fell at its steepest rate since late 2012 last month, figures showed. In Asia, South Korea’s exports fell for an eighth straight month in July amid weak global demand and a dispute with Japan. New export orders shrank the most in about six years.
Pressure on Chinese factories eased slightly, but manufacturing activity continued to shrink there too.
“The broader global trade dynamic remains a challenge,” Morgan Stanley strategist Michael Zezas said. “Trade should continue to drag on corporate confidence, capex and global growth in the near term.”
TAKING A POUNDING
In Europe’s foreign exchange markets, sterling dropped as low as $1.2101 and barely got back above $1.2110 as the Bank of England left interest rates unchanged and cut its inflation forecast amid plenty of interesting discussion.
Fears of a no-deal Brexit now that Boris Johnson is prime minister continue to afflict the pound, although it was fractionally higher against a weakening euro at 91.17 pence.
“Financial stability is not the same as market stability. In the event of no-deal, no transition Brexit, sterling would likely fall, the risk premiums on UK assets would rise and volatility would spike higher,” BoE head Mark Carney said.
Elsewhere, the Aussie dollar slipped below key chart support of $0.6832 to as low as $0.6828, a level not seen since an early January “flash crash”.
The kiwi hit a six-week trough of $0.6535 on expectations the Reserve Bank of New Zealand will cut rates next week.
U.S. crude futures fell 76 cents to $57.82 per barrel after comments on the rate outlook. Brent was down 71 cents at $64.34. Spot gold also fell, to $1,405.26.