The dollar scaled a 10-month high on Wednesday, pushing the euro and sterling to six-month lows and keeping the yen deep in intervention territory, as the prospect of higher-for-longer U.S. rates gripped markets. The euro was on track to fall 3% in the quarter, its worst quarterly performance for a year, as money markets repriced lower expectations for the Bank of England’s next rate hike and British inflation eased.
The pound also fell, though its slide was less pronounced as investors were wary of the risks to the global economy that might emerge from Britain’s Brexit negotiations and as political uncertainty weighed on investor sentiment. Traders were also wary that the BoE’s latest policy guidance may not offer much encouragement for an immediate rate rise.
Investors rushed to the dollar on concerns that a cooling global economy and fading inflation would pause Fed rate hikes, allowing for a prolonged period of historically low-interest rates. In a speech to the International Monetary Fund last week, Fed Chair Jerome Powell signaled that rate hikes would remain “data dependent” and a “pause” in the cycle is possible this month.
In the wake of Powell’s remarks, investors have slashed the odds for an immediate Fed rate hike by about 40% to just over 40%. The move has boosted demand for the dollar, weighing on the currencies of emerging economies. A stronger dollar makes it more expensive for those countries to buy oil and other commodities and can dampen consumer spending in a way that’s not as helpful as it might sound at first glance.
Investors are also looking ahead to the release of critical economic data in the coming days, focusing on consumer and producer price inflation and second-quarter gross domestic product. The data could provide clues to whether the slowdown in global growth is gathering pace or if central banks need to adjust their stimulus measures.
Adding to the dovish tone was an appearance by Japan’s Finance Minister Taro Aso, who warned that the government will continue to support the economy and currency if needed. The yen’s steady drift towards the 150 zone, where it was last seen before spurring record yen-buying intervention from Japanese authorities late last year, raises speculation that officials could intervene again.
Treasuries stabilized after their recent heavy selloff, though yields remained near 16-year peaks, keeping the greenback solidly bid. Asian stock benchmarks were weaker as fears about the impact of a slower global economy hit risk appetite. Investors were also cautious ahead of a slew of earnings results this week, including from Apple Inc. and Facebook Inc., as well as a raft of China manufacturing and service sector data. Amid the caution, the dollar gained ground against the yuan. Chinese exports rose for the first time in five months. The country is a big importer of raw materials and energy, making its economy highly sensitive to commodity prices.