Dollar soars after Fed remarks, and investors sell off treasuries
There is a blizzard of global data and events, but it wraas Fed chair Jerome Powell's remarks on Wednesday that set the markets running
London/Sydney — The dollar charged to its highest in more than two years on Thursday after the US Federal Reserve (Fed) spoilt hopes of a run of US interest-rate cuts.
A blizzard of global data and events was going on, but it was Fed chair Jerome Powell's remarks on Wednesday that set the markets running. Powell said the first US rate cut in over a decade was "not the beginning of a long series of rate cuts".
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.
World stocks had recoiled overnight and emerging markets had their longest run of falls in almost a year.
"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."
US treasuries were sold off as investors scaled back their pre-Fed 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 US close of 2.007%.
Core eurozone 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 emphasise after Wednesday's 25-basis-points move.
Instead, he characterised it as "a mid-cycle adjustment to policy", citing signs of a global slowdown, US trade tensions and a desire to boost inflation.
Wall Street fell afterwards and E-minis futures for the S&P 500 were pointing 0.15% lower.
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 US," 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 US 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's trade-reliant economies.
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.
South Korea, the world's sixth-largest exporter, is the first major industrial economy to release trade data each month, providing an early assessment on the health of global demand.
Pressure on Chinese factories eased slightly, but manufacturing activity continued to shrink.
"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."
In Europe's foreign exchange markets, sterling dropped as low as $1.2101 before a Bank of England meeting that's expected to leave its 0.75% interest rate unchanged but result in 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 .
"Sterling remains vulnerable to a further escalation in Brexit tensions and we anticipate the market will likely discount higher risks of a ‘no deal’ outcome in the weeks ahead," said Roger Hallam, currency chief investment officer at JP Morgan Asset Management.
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.
US crude futures fell 76c to $57.82 per barrel after comments on the rate outlook. Brent was down 71c at $64.34.
Spot gold also fell, to $1,405.26.