Dollar heads for its best week in nine months

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The dollar was headed for its best week since last September, while gold was on course for its worst in 15 months, after US central bank officials brought forward their projections for the first post-pandemic interest rate rise.

The dollar index, which measures the greenback against big currencies, rose 0.3 per cent on Friday and has gained about 1.8 per cent over the week. The move came in response to Federal Reserve policymakers’ projections on Wednesday that interest rates would rise from record low levels in 2023, from their earlier forecast of 2024.

Gold, which often moves inversely to the dollar because the metal is priced in the US currency, traded at $1,776 an ounce on Friday — a decline of more than 4 per cent from the start of the week and its largest weekly fall since March 2020.

“Because of the hawkish surprise of rate rise expectations having been brought forward, you’ve seen a pretty aggressive move in the dollar,” said Keith Balmer, multi-asset portfolio manager at BMO Global Asset Management. “Most of the market was bearish on the dollar ahead of this meeting,” he said, as traders anticipated the Fed keeping monetary policy ultra-loose, “but it is now less likely to weaken.”

Line chart of Dollar index  showing Bearish calls on dollar hit by rate rise forecasts

The price of Brent crude, the international oil benchmark that is traded in dollars, also fell for a second day on Friday, losing 0.6 per cent to $72.52 a barrel.

The Stoxx Europe 600 index, which hit an all-time high on Wednesday, dropped 0.8 per cent as European energy stocks fell by more than 2 per cent.

Futures markets signaled Wall Street’s S&P 500 index would dip 0.3 per cent in early New York dealings while the top 100 stocks on the technology-focused Nasdaq Composite would trade flat.

Bond markets traded calmly on Friday as investors viewed the earlier projections of a US rate rise as a signal that the central bank was willing to step in to control runaway price rises.

The yield on the benchmark 10-year US Treasury bond, which moves inversely to its price, was 0.03 percentage points lower at 1.481 per cent as traders bought the debt.

This yield has climbed from about 0.9 per cent at the start of the year but moderated in recent months as investors decided a 5 per cent leap in headline US inflation for the 12 months to May would either not be repeated or would be controlled by the central bank. Persistent inflation erodes the returns on fixed interest securities such as government bonds.

“The bond market narrative has been changing on a whim quite often,” said Tatjana Greil-Castro, co-head of public markets at credit investor Muzinich. “First we had this idea [coming out of the Covid-19 crisis] that inflation will be permanently high. Then the story was that this was the top and [inflation] would be going down, and I think the story keeps changing because we just don’t know yet.”

The US rate rise forecast, added Deutsche Bank strategist Jim Reid, “marked another vote of confidence that the Fed would prove able to keep [price] pressures contained”.

Elsewhere in markets, the euro was flat against the dollar at $1.190 but has lost about 1.6 per cent against its US counterpart this week. Sterling fell 0.2 per cent to $1.388.

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