The dollar’s recent rally stalled on Wednesday in spite of renewed expectations of further US interest rate rises following the release of the minutes of the last Federal Reserve policy meeting.
Equity markets put in relatively lacklustre performances but precious metals prices advanced as investors sought protection from the threat of inflation.
The minutes of last month’s Federal Open Market Committee meeting showed that the US central bank felt further increases in borrowing costs were necessary to fend off growing inflationary pressures.
“We are now convinced that the Fed is going to tighten through year-end and into 2006 – we are raising our [Fed] funds [rate] forecast to a 4.5 per cent peak from 4 per cent – although we are of the view that the inflation preoccupation is overdone and hence we are not turning bearish on long-term bonds,” said David Rosenberg, chief US economist at Merrill Lynch, in a research note.
Mike Lenhoff, chief strategist at Brewin Dolphin Securities, took the view that rates could rise even further.
“Since the Fed embarked on its policy of “normalisation” [of monetary policy] the markets have discounted the view that neutrality for the funds rate might lie somewhere in the region of 4.5 per cent,” he said.
“But with the Fed’s more recent preoccupation with inflation there is a growing concern that the funds rate may now move beyond the bounds of policy normalisation, possibly to 5 per cent or more.”
The Fed’s hawkish tone helped the dollar climb to a 17-month high against the Japanese yen and an 11-week peak against sterling in early trade.
But the US currency eased back as the session wore on as investors booked profits after four days of gains.
Wall Street got off to an uncertain start as interest rate concerns were offset by gains for Pfizer after the drugs company won a crucial court case in the UK.
By the close in New York, the Dow Jones Industrial Average was down 0.4 per cent, the S&P 500 was 0.6 per cent lower and the Nasdaq Composite index was off 1.2 per cent.
European stocks turned downward after two days of gains, with the FTSE Eurofirst 300 index falling 0.7 per cent to 1,204.29.
Asia was also broadly weaker. Tokyo ran into profit-taking following Tuesday’s hefty advance, and the Nikkei 225 Average fell 0.7 per cent, while Seoul and Hong Kong each shed 2.2 per cent and Taipei retreated 1.3 per cent.
Gold briefly pushed above $480 an ounce to touch its highest level for more than 17 years as funds bought up the metal amid inflation concerns. “With the significant level of fund enthusiasm [set] to drive prices higher and a favourable technical trend, gold appears likely to test the next resistance at $481 in the near term,” said Barclays Capital.
By the end of European trading, however, spot gold was back down to about $475 an ounce.
Platinum hovered round a 25½-year high, while silver touched its best for 10 months. Copper eased back from an earlier all-time peak of $3,984 a tonne.
Crude oil prices rose after the Energy Information Administration said world demand for oil would rise next year but lowered its estimate of production from non-members of the Organisation of the Petroleum Exporting Countries.
At the close in New York, November West Texas Intermediate on Nymex was back above $64 a barrel, still well below the nominal all-time high of $70.85 struck at the end of August.
