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Dollar stays soft in wake of Fed’s ‘dovish’ hike

Friday 18:15 GMT

What you need to know
● Wall Street little changed but higher for week
● US Treasury bond yields slip
● Dollar soft versus yen and sterling
● Oil prices struggle for clear direction
● Gold heads for a highest close in two weeks
——————-

Overview

An action-packed week for financial markets ended on a quieter note with global equity indices little changed, US Treasuries slightly higher and the dollar putting in a mixed performance.

Oil prices struggled to establish a clear direction, although gold was heading for its highest finish in a fortnight.

Hot topic

The US Federal Reserve dominated the week’s proceedings as its open market committee delivered a widely expected 25 basis point rise in interest rates but maintained its forecasts for the pace of tightening this year and next.

It was bad news for dollar bulls, and the US currency subsequently slipped to multi-week lows against its main G20 rivals. The Mexican peso and South African rand led the way as emerging market currencies staged a broad advance.

“The Fed, in resisting the temptation to raise its estimate of where rates are heading in the long term, has reinforced its reputation as a dovish rate-setter,” said the FX strategy team at Société Générale.

“With the market reluctant to price in the pace of rate hikes the Fed is expecting to make, there’s still a bit of life in the dollar rally — but not much and not for long. Meanwhile there’s little here to really spook risk sentiment and risk-correlated currencies.”

The dollar index, a measure of the US unit against a weighted basket of peers, was down 0.1 per cent at 100.26 on Friday, and 3.4 per cent below a 14-year high struck at the start of January.

Sterling put in one of the week’s best performances against the dollar, and its 0.3 per cent gain on Friday to $1.2393 left it 1.8 per cent higher over the five-day period.

In contrast to the Fed’s “dovish hike”, the Bank of England’s decision to keep rates unchanged this week was viewed by many as a “hawkish hold”, after one member of the UK Monetary Policy Committee unexpectedly voted for a rise in borrowing costs.

Analysts were quick to point out that the dissenting voter — Kristin Forbes — would be departing from the MPC after its June meeting.

“However, the overall tone [of the meeting] was less dovish than might have been expected,” noted Ian Williams, strategist at Peel Hunt.

“There was also a suggestion that other members are closer to voting in favour of tighter policy, should the data continue to surprise to the upside.”

The dollar was 0.5 per cent weaker against the yen at ¥112.70 — the lowest since the end of February and down from ¥114.74 a week earlier.

The euro, although 0.2 per cent lower against the dollar at $1.0744, was 0.7 per cent firmer on the week and well up from a midweek low of $1.0602.

As well as the Fed’s cautious stance on rates, the poor showing by the anti-EU Freedom party of Geert Wilders and in this week’s poll in the Netherlands supported the single currency.

“The Dutch election was a reminder that the world is not always full of surprises and in turn helped to further calm jitters over the upcoming French election,” said Divyang Shah, global strategist at IFR Markets. “After the FOMC/Dutch election combination, the implied [European equity] volatility index sank close to record lows. The lack of volatility can be seen not only in equity markets but also in bond and FX markets, where measures of implied volatility have fallen sharply.

“It simply has not paid to take a negative view on the market, and this continues to be the case.”

Equities

US equities were largely unfazed by the Fed’s move, with the S&P 500 rallying to within striking distance of its record close before edging back slightly. In early afternoon trade on Friday it was flat on the day at 2,381 and up 0.4 per cent for the week.

The pan-European Stoxx 600 index rose 0.2 per cent to a 15-month peak as the French and Dutch stock markets climbed to multiyear highs. London’s FTSE 100 ended the week at a record high.

Emerging market stocks were heading for their best week in eight months.

Japan’s Topix index fell 0.4 per cent and in China the Shanghai Composite shed 1 per cent, giving back all of the previous day’s advance.

In Hong Kong, the benchmark Hang Seng index was up 0.1 per cent as falls in consumer discretionary stocks were offset by a rally in telecoms.

Fixed income

Yields on benchmark Dutch and French government bonds — which move inversely to the price — fell during the course of the week as that on the German 10-year Bund shed 6bp to 0.43 per cent.

US Treasuries put in a strong showing after the conclusion of the central bank meeting. The 10-year yield was down 3bp on Friday at 2.50 per cent — 8bp lower on the week and 13bp below a midweek intraday high.

Commodities

Oil prices steadied after hitting three-month lows this week amid concerns about swollen US crude inventories and Saudi Arabia’s commitment to output cuts.

Brent, the international benchmark, was down less than 0.1 per cent at $51.71 a barrel — but up 0.7 per cent on the week and well off Tuesday’s $50.25 low.

Gold benefited from the soft dollar, rising $3 to $1,229 an ounce for a weekly gain of $24.

Additional reporting by Hudson Lockett in Hong Kong

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