The US dollar stands tall, poised for its most significant weekly gain in months, buoyed by hawkish commentary from Federal Reserve Chair Jerome Powell that sent tremors through global markets.
Powell’s remarks, signaling a less aggressive approach to interest rate cuts, propelled short-term Treasury yields upward, painting a mixed picture for investors as Asian shares stabilized while Wall Street and European futures dipped.
Powell’s comments reshape rate cut expectations
Powell’s assertion that the Fed is in no rush to cut rates, citing continued economic growth, a robust job market, and persistent inflation above the 2% target, has significantly tempered expectations for a rate cut next month.
Fed fund futures tumbled, with December contracts reflecting a diminished likelihood of easing.
The probability of a December rate cut now stands at just 61%, down sharply from 82.5% prior to Powell’s comments.
Dollar strengthens amidst shifting global monetary policy
The dollar’s ascent has been particularly pronounced against the euro, as expectations of more aggressive policy easing in Europe weigh on the single currency, already trading near one-year lows.
This divergence in monetary policy outlooks between the US and Europe further amplifies the dollar’s dominance in the currency market.
Goldman Sachs now anticipates a higher probability that the Fed will slow the pace of easing sooner than previously expected, potentially as early as December or January.
JPMorgan, while still forecasting a December rate cut, also foresees a potential scaling back of easing in January.
“After the sugar hit of Trump’s election and its subsequent impacts on expectations for company profits, the market’s enthusiasm is being watered-down by greater interest rate uncertainty, especially going into next year,” said Kyle Rodda, a senior analyst at Capital.com.
The ripple effects of Powell’s hawkish turn were felt across global markets.
Nasdaq and S&P 500 futures retreated, mirroring declines in EUROSTOXX 50 futures.
However, Asian shares showed signs of stabilization after a turbulent week, partially supported by positive Chinese retail sales data.
Asian markets: navigating volatility
MSCI’s broadest index of Asia-Pacific shares outside Japan edged higher, but still registered a substantial weekly loss, its largest since June 2023.
A regional healthcare index lagged, impacted by news of Robert F. Kennedy Jr.’s nomination to lead the top US health agency, given his stance on vaccines.
Tokyo’s Nikkei index found support from a weakening yen, which benefits Japanese exporters.
Currency dynamics in focus
The dollar continued its climb against the yen, reaching its highest level since July.
However, Japanese authorities remain vigilant, with the finance ministry reiterating warnings against excessive currency fluctuations.
The Bank of Japan also announced an upcoming speech by Governor Kazuo Ueda, which will be closely scrutinized for insights into the timing of the next rate hike.
Chinese markets presented a mixed picture, with better-than-expected retail sales growth offset by weaker industrial output and deepening declines in property investment.
Even before Powell’s comments, US producer price data hinted at persistent inflationary pressures, adding to market concerns about the pace of future easing.
Short-term Treasury yields surged in response and remained elevated, reflecting investors’ reassessment of the interest rate outlook.
Dollar’s reign and commodity pressures
The dollar’s robust performance weighed on commodity prices.
Gold suffered significant weekly and monthly losses, while oil prices also retreated.
The euro remained under pressure, facing substantial weekly losses.
Minutes from the European Central Bank’s latest meeting suggest that the recent rate cut was primarily a precautionary measure.
However, market expectations lean towards more dovish ECB policy, with a significant probability assigned to further easing in the coming months.
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