Investors weigh rates and economic outlooks as the dollar rises
On Thursday, the dollar gained ground, supported by an increase in U.S. Treasury yields. Investors weighed the outlook of Federal Reserve policy against the possibility that high interest rates could cause a recession.
Next week will bring a host of important central bank decisions, including those of the Federal Reserve, European Central Bank, and Bank of England.
Investors and traders need to know if inflation has reached its peak. This will allow policymakers greater flexibility to offer lower interest-rate increases in the months ahead.
The U.S. monthly consumer inflation report is due next week. It will be available one day prior to the Fed’s policy meeting Dec. 14. This could play a pivotal role in setting long-term expectations for monetary policies.
The dollar was generally stable against a variety of major currencies. At $1.0507 the euro was flat, with the pound falling 0.3% to $1.2171.
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The yen, which can be sensitive to changes in U.S. Treasury yields, fell 0.25 percent to 136.90, losing some of Wednesday’s 0.4% gain.
Dollar edges up, investors weigh outlooks for rates and economy https://t.co/3q8GpfKonE pic.twitter.com/V9fsOjnMe2
— CE-INVESTMENTS (@ce_investments) December 8, 2022
Since October’s 15-year peak, the yield on the 10-year Treasury has been falling almost continuously. It lost almost a whole percentage point. It actually reversed almost half of the increase that occurred between August’s lows for four months and October’s peak at 4.34%.
Oil prices are now below $80 per barrel, for the first time since Russia invaded Ukraine in February. This is due to growing concern about how a slowing global economy will affect global energy demand.
Brent crude oil futures are now at $78, almost half the drop from early March’s high of $139.13, which was a 14-year-old record. According to the American Automobile Association (AAA), gasoline prices at the pump in the United States have dropped to $3.329 in June, a record $5.016. This is 0.4% less than last year.
Market-based expectations of inflation have slowed as energy prices have fallen. The 10-year breakeven inflation spread is just 2.27%. It subtracts the yield from an inflation-linked Treasury from that of a nominal 10-year note. It peaked at 3% in April.
These forces and diminishing expectations that the Fed will continue raising interest rates aggressively have slashed 6.2% from the dollar’s value so far in this quarter.
According to Refinitiv data, this has set the greenback up for its worst quarter since the third quarter 2010, when it fell 8.5%. However, it is on track for its worst fourth-quarter performance ever since 2004.
Lee Hardman, currency strategist at MUFG said in a note that “the price action continues to emphasize that market participants are becoming less worried about upside inflation risks and more concerned about downside risks to global growth.”
The 10-year yield was at its lowest point in three months, with the rate of 3.45% being up 5. bps.
According to money markets, there is a 91% chance the Federal Open Market Committee will increase rates by half a percentage point next week and a 9% chance they will add 75 basis points. The rate of interest is now at a peak of just below 5%, as seen in the money markets.
The yuan was close to a three-month high, as China announced another relaxation in its COVID restrictions.
Offshore trading saw the U.S. dollar rise 0.1% to 6.9670 Yuan, reversing some of Wednesday’s 0.34% drop. This was after the Chinese government announced that it would relax some COVID-19 restrictions that had severely hampered the Chinese economy.
