Thursday 21:00 GMT
The dollar surrendered early gains against the euro and the yen while Treasury bond yields moved sharply higher for a second day, as participants focused on comments on inflation and interest rates from central bankers on either side of the Atlantic.
US equity indices lost ground, with energy stocks under pressure in spite of a rally for oil prices. Gold spent much of the day back below $1,200 an ounce before recovering that level late in the session.
The euro fell as low as $1.0590 against the dollar before recovering to trade 0.3 per cent higher at $1.0660, while the US currency retreated from an early peak against the yen of ¥115.61 to stand less than 0.1 per cent firmer at ¥114.72.
The European Central Bank left its policy stance unchanged after its meeting yesterday and Mario Draghi, its president, appeared relaxed about a pick-up in headline eurozone inflation to a three-year high.
“Mr Draghi noted that inflation had increased ‘markedly’ but emphasised that underlying inflationary pressures remained subdued,” said Cathal Kennedy, European economist at RBC Capital Markets.
“The ECB maintained its dovish bias — interest rates would remain at present or lower levels for an extended period; asset purchases would continue to the end of 2017 or beyond if necessary; the governing council stood ready to increase the programme if the outlook were to become less favourable.”
Mr Draghi’s dovish stance contrasted with comments in a speech on Wednesday by Janet Yellen, Federal Reserve chair, that the US risked a “nasty surprise down the road — either too much inflation, financial instability or both” — if the central bank waited too long before raising interest rates again.
“Ms Yellen’s remark suggests the Fed is standing ready to hike rates at a faster pace than currently priced into the rate forward curve,” said Hans Redeker, foreign-exchange strategist at Morgan Stanley.
Indeed the yield on the two-year US Treasury — which is highly sensitive to interest rate expectations — was up 3 basis points at 1.23 per cent for a two-day rise of 7bp. The 10-year yield was 8bp higher at 2.46 per cent and up 13bp since Tuesday’s close.
In spite of Mr Draghi’s dovish tone, the 10-year German Bund yield rose 3bp to 0.38 per cent.
Wall Street remained cautious of reloading “Trump trades” ahead of the presidential inauguration today.
The benchmark S&P 500 index fell 0.4 per cent to 2,263 while the Dow Jones Industrial Average also ended 0.4 per cent lower at 19,731 — wiping out its 2017 gain.
The CBOE Vix volatility index, watched as a gauge of stock market stress, was up 3.2 per cent in late trade at 12.88, the highest since January 3.
There was little impact from the latest batch of US economic reports, which although widely viewed as “second-tier” releases, appeared to justify Ms Yellen’s more hawkish tone on Wednesday.
Initial jobless claims fell to a 43-year low last week, December housing starts rebounded after a big decline the previous month and the Philadelphia Fed’s business activity index in January hit its highest level since November 2014.
“The three reports together reiterate the reality that the housing market remains healthy in broad terms, demand for labour continues to run strong, limiting lay-offs, and manufacturing — although likely to cool somewhat ahead due to the strong dollar — is overall a sector in better shape now than in the last two years,” said Anthony Karydakis, chief economic strategist at Miller Tabak.
In Europe the pan-regional Stoxx 600 index slipped 0.1 per cent, while a fresh rebound for sterling against the dollar left the FTSE 100 in London down 0.5 per cent. The pound was up 0.6 per cent at $1.2330.
Trading in Asia was mixed. The yen’s fall late on Wednesday, helped the exporter-sensitive Japanese market. The Topix index rose 0.9 per cent even as shares in Toshiba fell 16 per cent after reports the loss in its US nuclear business would be larger than the ¥500bn ($4.4bn) previously estimated.
Greater China shares were weaker, with Hong Kong’s Hang Seng off 0.2 per cent and the Shanghai Composite easing 0.4 per cent.
Oil prices were higher even after news that US crude inventories had risen more than expected for a second successive week.
Brent, the international benchmark, rose as high as $54.77 before settling 0.5 per cent firmer at $54.16. US West Texas Intermediate was up 0.6 per cent in late trade at $51.37.
Gold was up $1 at $1,205 an ounce, having earlier touched $1,196.
Additional reporting by Hudson Lockett in Hong Kong
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