The dollar came under renewed selling pressure on Tuesday, helping to drive the price of gold to another record high, as caution over the unfolding corporate earnings season led to a nervous session for equity markets.
The US US currency’s trade-weighted index touched a 14-month low and the euro climbed to within a whisker of $1.49 as investors focused on the outlook for US interest rates.
Andrew Wilkinson, senior analyst at Interactive Brokers, said the dollar was “falling apart at the seams”, even as economic recovery was becoming entrenched in glowing stock market performances round the world.
“In recent days, the dollar demise has shifted gear and attracted plenty of media attention. This is a common occurrence when seismic trends begin shifting,” he said. “The bigger problem for the dollar is what might be in store next.”
Lena Komileva, head of G7 market economics at Tullet Prebon, said that in a yield-sensitive foreign exchange market, dollar sentiment was unlikely to turn round until the Federal Reserve’s policy cycle
She said this was likely to arrive earlier than generally assumed when the Fed begins draining excess dollar liquidity from the market through reverse repurchase agreements this month. “This will not be the beginning of a tightening cycle, but it will be an important psychological transition point, as it would signal that the Fed is prepared to take its foot off the accelerator, leaving other central banks to carry a bit more of the weight of market stability.”
Mike Lenhoff, chief strategist at Brewin Dolphin, said that at a very rough estimate, a 10 per cent depreciation in the dollar, as measured by its trade-weighted index, boosted earnings for the S&P 500 by 4 to 8 per cent, with a two- to three-quarter lag.
“This means the dollar’s 15 per cent depreciation since March…should be starting to come through with the third quarter’s results and, spread over this quarter and next, could be adding something in the range of 6 to 12 per cent to earnings.”
Corporate numbers were certainly the main focus for equity markets equity markets, as disappointing figures from Johnson & Johnson and caution ahead of earnings from leading banks this week led to nervous trading on Wall Street.
The S&P 500 closed down 0.28 per cent from Monday’s 2009 closing high, while the pan-European FTSE Eurofirst 300 index fell 1 per cent.
Asian markets mostly managed moderate gains although the underlying mood was cautious. In Tokyo, the Nikkei 225 Average rose 0.6 per cent, while Hong Kong added 0.8 per cent and the Shanghai Composite rose 1.4 per cent.
European credit derivatives held up in the face of the losses in equity markets. The Markit iTraxx Crossover index of mostly junk-rated credits, a widely watched gauge of risk appetite, was 0.5 basis points tighter at 546.5bp.
Government bonds showed a more marked reaction to equity weakness. The yield on the 10-year US Treasury was down 6bp at 3.33 per cent but still some way off recent five-month lows.
In Europe, the two-year Schatz yield fell 3bp to 1.31 per cent.
Prices were lifted by the euro’s stronger tone and by a weak reading of German investor sentiment in the ZEW institute’s latest report.
The headline ZEW index fell for the first time for a year in October, defying expectations for a modest increase.
“Enthusiasm is gradually giving way to realism,” said Carsten Brzeski, economist at ING. “Even the election results with possible tax cuts to come did not lead to another increase in analysts’ sentiment.”
He added: “The German economy is about to enter calmer waters. Still, it could still outperform most if not all of its fellow eurozone countries next year.”
In commodities commodities, gold extended its record-breaking run to reach a high of $1,068.30 a troy ounce. Analysts have suggested that further gains are likely if the dollar remains under pressure.
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