Markets: Dollar sinks to 5-week low; Stocks cool down

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Dollar index at five-week low
● Treasury and Bund yields move higher
● European equities soft as S&P 500 futures ease back
Oil prices steady after a volatile week

Has the buck bounce run its course? The dollar index (DXY) — a measure of the greenback against a basket of currencies — is down fractionally to 100.35, its lowest in five weeks.

The DXY hit a 14-year high of 103.82 at the start of 2017, as traders made bets that the proposed Trump policies of tax cuts and infrastructure spending would lift the US economy and cause the Federal Reserve to raise interest rates at a faster pace.

Following some better US economic data — including last week’s sturdy jobs report — the Fed this week did indeed increase borrowing costs.

But investors have inferred from the central bank’s accompanying commentary that it would continue to be very cautious in normalising monetary policy unless it saw evidence that the mooted Trump plans were causing growth to accelerate markedly.

And there are signs that even though we are only a few months into the Trump presidency, the optimism among investors is starting to fade that the administration will be able quickly to deliver its stimulus boost — particular if it continues to expend energy on non economic issues such as immigration, as well as spats with the media and security services.

Derek Halpenny at MUFG writes:

The understandable question being posed today is: “Is the dollar bull run over?”

Our answer to that question at this stage is NO, but the window is closing.

We would argue that the price action at this juncture is more a reflection of positioning and the message relayed by the FOMC if anything points even more starkly to the need for the rates market to adjust to the coming reality.

We believe the FOMC course remains firmly set and the risks are certainly skewed toward the ‘dots’ guidance changing to indicate an additional rate increase in the second half of the year as the labour market continues to improve.

The euro has a weighting of about 58 per cent in the DXY and the common currency’s latest rally is an important factor behind the buck’s trade-weighted weakness.

The euro is up just 1 pip to $1.0765 on Friday, but it rose sharply midweek and hovers at a six-week high. Analysts at Citi note the currency received a boost from comments on Thursday from European Central Bank member Ewald Nowotny, in which he said deposit rates could be raised before the main refinancing rate.

Mr Halpenny also points out that the latest burst of strength in the pound is also accentuating the dollar’s dip.

The dollar is however a touch firmer against other peers, adding 0.1 per cent to ¥113.41 and gaining 0.1 per cent to $1.2344 per pound.

What to watch
There is another batch of US economic data for traders to digest going into the weekend.
Industrial production for February is due to be released at 13:15 GMT, followed at 14:00 GMT by the University of Michigan consumer sentiment report for March and February’s Leading Indicators.

The Group of 20 finance ministers will meet in Germany this weekend and investors will be keen to see whether the Trump administration’s protectionist tendencies cause any tension.

Equities
US index futures suggest the S&P 500 will lose 2 points to 2,379.4 when trading gets under way later in New York, and this soft showing — which follows a 4 point dip on Thursday — is damping sentiment across global bourses.

The pan-European Stoxx 600 is down 0.4 per cent as energy stocks dip. London’s FTSE 100, which closed the previous session at a record high, is holding its gains despite miners seeing some profit-taking following a recent surge.

Fixed income
Sovereign bond yields, which move opposite to prices, are again trundling higher as investors bet on central banks being less accommodative in coming months.

The 10-year US Treasury is up one basis point to 2.54 per cent and equivalent maturity German Bunds are adding 3bp to 0.48 per cent.

The move leaves Bund yields within a few basis points of the 14-month high touched earlier this week as some investors reduce their holdings of “haven” German paper as they become more relaxed about the eurozone’s political profile following the Dutch election.

Commodities
Oil prices are little changed at the end of a week that saw bouts of heightened volatility as traders absorbed conflicting reports about production and inventory levels.

Brent crude, the international benchmark which on Tuesday fell to a three-and-a-half low of $50.25 per barrel, is down 0.1 per cent to $51.67, while US marker West Texas Intermediate is flat at $48.75.

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