Dollar claws back early Fed-driven losses

Thursday 18.15 BST

What you need to know

  • Euro back below $1.17, dollar regains ¥111 level
  • Focus stays on Federal Reserve policy outlook
  • Solid earnings drive Wall Street indices to records
  • Brent oil at six-week high above $51 a barrel
  • Dollar recovery undermines gold price


The dollar clawed back early losses and Treasuries gave back some of the previous day’s gains as the markets continued to digest Wednesday’s policy statement from the Federal Reserve.

Wall Street extended its run of record highs — with all three main indices on track to reach all-time intraday peaks — as quarterly earnings reports continued to please. However, European stocks were reined in by lingering concerns about the euro’s recent burst of strength.

Oil prices found fresh support from bullish US inventories data released on Wednesday, with Brent trading around an eight-week high above $51 a barrel.

Hot topic

But it was the currency markets that grabbed the headlines as the dollar climbed off a two-and-a-half year low against the euro and regained the ¥111 level versus the yen. Sterling retreated from a 10-month high.

Some in the markets pointed to news of a strong rise in headline US durable goods orders last month, although the ex-transportation reading was less impressive.

On Wednesday, the Fed’s Open Market Committee left interest rates unchanged and said it would make an announcement on reducing its balance sheet “relatively soon.”

But the markets zoomed in on the subtlest of tweaks to the Fed’s statement — its description of inflation as now running “below” target rather than “somewhat below”, the phrase used after its June meeting. The dollar fell sharply and Treasury prices and gold rose.

“What’s a word worth? Apparently at least 6 basis points on a 10-year Treasury,” commented Tom Porcelli, chief US economist at RBC Capital Markets.

Lena Komileva at G+ Economics said: “As ever, macro market strategy is a function of two inputs — what the Fed says, and what the market hears.

“In economic terms, the FOMC said nothing that changed its policy strategy — the Fed remains in a tightening cycle and a balance sheet announcement is in the making for the next policy meeting on September 20.

“But investors continue to speculate that the Fed will change its stance to take a dovish turn soon; it was the shift in language around inflation, instead of the Fed’s balance sheet policy guidance, that caused the subsequent market volatility.”

Divyang Shah, global strategist at IFR Markets, highlighted that the potential for Fed doves to stall the rate normalisation process, once the balance sheet reduction starts, was real.

“This will muddy the rate outlook for December and during 2018,” Mr Shah said. “The journey to a neutral Fed funds rate has so far had a relatively easy ride, but is headed for more bumpy terrain.”

Meanwhile, Pernille Bomholdt Henneberg, chief analyst at Danske Bank, said the appreciation of the euro would be a headwind to headline and core inflation in coming years. “The weaker inflation outlook is likely to keep the European Central Bank on a dovish path, especially as the latest rise in core inflation is not sustainable.

“The risk is that the ECB will stay hawkish as it needs an ‘excuse’ to taper quantitative easing, given that technical restrictions are again challenging a QE continuation,” he said.

The euro rose as high as $1.1776 yesterday, its strongest level against the dollar since the start of 2015 — but subsequently retreated sharply to $1.1669, down 0.5 per cent on the day. The dollar bounced off a low of ¥110.79 to trade 0.4 per cent stronger at ¥111.59, while sterling shed 0.5 per cent to $1.3056.

The dollar index was up 0.3 per cent at 93.98, but still near a 13-month low.

Fixed income

The yield on the 10-year US Treasury — which moves inversely to its price — recouped 3bp of Wednesday’s decline. By contrast, the 10-year German Bund yield ended 3bp lower at 0.53 per cent and the equivalent UK gilt shed 4bp to 1.20 per cent.

Sovereign bonds across the Asia Pacific region gained across the board on Thursday, recouping the previous day’s losses.

The 10-year Australian government bond yield was 1 basis point lower at 2.7 per cent, while that on the equivalent Japanese note was flat at 0.07 per cent.


The euro’s retreat did little to help European equity indices, even after solid earnings reports from the likes of Roche and AB InBev. The pan-regional Stoxx 600 fell 0.1 per cent and Germany’s exporter-heavy Xetra Dax shed 0.8 per cent.

But there was no stopping Wall Street’s bulls as well-received results from Facebook and Verizon fuelled record highs for the S&P 500, Dow Jones Industrial Average and Nasdaq Composite. The S&P was up 0.2 per cent at midday in New York at 2,482.

The CBOE Vix volatility index was down 3.7 per cent at 9.25 and heading for a record closing low.

Japan’s Topix rose 0.4 per cent as a drop in the financials segment offset gains elsewhere. Hong Kong’s Hang Seng index was up 0.7 per cent.


Energy stocks fell modestly on both sides of the Atlantic, even as Brent oil rose 0.6 per cent to $51.27 a barrel, while copper held close to a two-year high struck in London on Wednesday.

The dollar’s rally knocked gold off a six-week high to trade $4 lower at $1,256 an ounce.

Additional reporting by Kate Allen in London

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