Picture: BLOOMBERG
Picture: BLOOMBERG

London — The dollar hovered below the previous session’s one-year highs on Thursday on growing expectations the US Federal Reserve would tighten policy in coming months, while Asian shares were headed for their worst quarter since the pandemic hit.

Resolving “tension” between high inflation and still-elevated unemployment is the most urgent issue facing the Federal Reserve right now, Fed chair Jerome Powell said on Wednesday, acknowledging the central bank’s two goals of stable prices and full employment are in potential conflict.

This focus on inflation helped the US currency to end the quarter on a positive note.

“In the currency markets, there are expectations that the Fed will tighten, and the dollar is a safe asset,” said Sebastien Galy, senior macro strategist at Nordea Asset Management.

The dollar was steady at 94.282 against an index of currencies, heading for a gain of 2.1% on the quarter. It was little changed against the euro at $1.1606 and the yen at ¥111.91. In addition, “the ongoing US debt ceiling stand-off could briefly amplify financial market jitters and support the dollar in the short-term,” said analysts at CBA in a note.

US legislators continue to wrangle over funding the government but face a Friday deadline to prevent a shutdown.

S&P futures gained 0.8% after the S&P 500 closed 0.16% higher.

The yield on benchmark 10-year treasury notes was 1.5237%, down 1.5 basis points, having risen sharply earlier in the week.

MSCI’s broadest index of Asia-Pacific shares outside Japan gained 0.14% after several days of losses, but was still set for a 4.5% monthly decline and a 9.4% loss on the quarter.

That would be the benchmark’s worst quarter since the first three months of 2020, as Covid-19 raged across Southeast Asia and investors worried about slowing global growth with China a particular concern.

China’s economy has been hit by regulatory curbs in the tech and property sectors and is now grappling with a power shortage.

Data published on Thursday showed China’s factory activity unexpectedly shrank in September, but services returned to expansion as Covid-19 outbreaks receded.

However, analysts say slowing growth would pressure authorities to ease policy. That provided battered Chinese markets with some respite, with blue chips rising 0.67%.

Shares in embattled developer China Evergrande, meanwhile, were down 5.2%.

The company missed paying bond interest due on Wednesday, two bondholders said, missing its second offshore debt payment in a week, although the cash-strapped company is scrambling to meet its obligation in its home market.

World stocks gained 0.15% after several days of losses but were set to end the quarter down nearly 1%, after hitting record highs earlier this month.

The Nikkei lost 0.31% a day after Japan’s ruling party chose softly spoken consensus-builder Fumio Kishida as its new leader and the country’s new prime minister.

European stocks rose 0.89%, with the UK’s FTSE and France’s CAC 40 up 0.75%, despite worries about soaring prices.

Electricity prices in France are expected to rise about 12% by February, French environment minister Barbara Pompili said on Thursday, highlighting inflationary pressures sweeping across Europe.

“It's a difficult series of shocks we're going through - the market ignores it completely,” Galy said. “The market is not particularly rational, we are continuing our merry dance.”

French inflation hit a near 10-year high of 2.7% in September, official numbers showed, coming in slightly less than forecast.

Germany's 10-year government bond yield was little changed at -0.21%,

Oil prices gained as selling prompted by an unexpected rise in US inventories eased, with analysts predicting supply may not keep up with a recovery in demand

Brent crude was up 0.36% at $78.92 a barrel while US crude rose 0.48% to $75.20.

Spot gold traded at $1,732/oz, edging off its seven-week low, but still constrained by a strong dollar.

Reuters

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