Dollar’s advance hits commodities, Fed signals tightening

Dollar’s advance for fifth straight session pressures commodities and Asian shares, as Fed official signals possibility of second increase in US interest rates

Photo by: Reuters
Photo by: Reuters

A worker counts US 100-dollar banknotes inside a money changer in Manila, Philippines March 23, 2016.

The dollar advanced for a fifth straight session on Thursday, pressuring commodities and Asian shares after yet another Federal Reserve official talked up the chance of more than one increase in US interest rates this year.

If the dollar can keep its footing here it will notch up the first weekly gain in a month against a basket of major currencies.

The euro eased to $1.1171, leaving it well off last week's top of $1.1342. Sterling also slid to $1.4096 on concerns the attacks in Brussels would aid the campaign to leave the European Union in June's "Brexit" vote.

Equity investors tend to dislike any hint of tighter US policy and MSCI's broadest index of Asia-Pacific shares outside Japan slipped 0.9 percent.

The resource-heavy Australian market lost 1 percent and Shanghai 0.9 percent.

A softer yen helped Japan's Nikkei recoup its early losses and nudge up 0.1 percent, though trading house Mitsui & Co dived 7 percent after suffering its first ever loss.

On Wall Street the Dow ended Wednesday with a loss of 0.45 percent, while the S&P 500 eased 0.64 percent and the Nasdaq 1.1 percent.

St. Louis Fed President James Bullard joined a chorus of officials in highlighting the risk of at least two rate hikes this year, with the first perhaps as soon as April.

Markets imply only one increase and dealers suspect an orchestrated attempt by the Fed to shift that thinking.

"There is now some speculation on April, as Bullard adds to the relatively optimistic Fed rhetoric this week,"

"The focus now turns to Fed Chair Yellen who will be speaking at the Economic Club of New York next Tuesday, which could give further clarity on the matter."

Yet for all the Fed's chatter about multiple hikes, the market seemed far from convinced. Fed fund futures imply almost zero chance of a move in April and a rate of just 61.5 basis points by year end. The current effective funds rate is 37 basis points.

It was also notable that Treasury yields actually fell in response, with the 10-year back down at 1.88 percent from a high of 1.95 percent on Wednesday.

Still, the rise in the dollar sparked profit-taking in a range of commodities from oil to gold to copper.

Oil took a further knock when data showed crude stockpiles had risen by three times the amount expected in the latest week. US crude fell a further 6 cents to $39.73 a barrel, after sliding 4 percent on Wednesday. Brent inched up 10 cents to $40.57.

Gold was down at $1,216.80 an ounce (roughly 28 grams), after hitting its lowest since late February at $1,214.70.

TRTWorld, Reuters