Finance in Focus: Dollar at eight-month low as Dow average erases decline for 2016

by AB19 Mar 2016
The dollar sank to an eight-month low, oil topped $40 a barrel for the first time in three months and the Dow Jones Industrial Average erased losses for the year as the Federal Reserve’s scaled-back path for interest-rate increases sparked demand for riskier assets.

The Bloomberg Dollar Spot Index has fallen more than 2 percent since the Fed’s Wednesday decision to set a higher bar for when it may raise rates again. Rallies by industrial, raw-material and energy stocks helped the Standard & Poor’s 500 Index climb almost all the way back from a loss that reached 11 percent in a month ago. Dollar-denominated commodities from copper to zinc surged, while crude rallied 4.5 percent. Emerging-market assets jumped to the highest since December.

Actions by central banks to stimulate growth has fueled a rebound in risk assets from equities to raw-material prices, after almost $9 trillion was erased from global stocks at the start of the year. The Fed’s updated projections on Wednesday implied two quarter-point increases this year, down from four forecast in December. Chair Janet Yellen said Wednesday that the general slog of growth world-wide is why “a slightly lower path for the federal funds rate will be appropriate.” Norway cut rates Thursday, following similar moves in recent weeks by the European Central Bank and Bank of Japan. Switzerland and the U.K. left interest rates unchanged.

“This is a strong rally and the main catalyst is the return of easy money,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. “The Fed announcement yesterday was the latest sign that central banks are going to continue with stimulus. This is putting downward pressure on the dollar, which favors commodities.”

The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major peers, sank 1.1 percent at 4 p.m. in New York, after losing the same amount in the last session.

South Africa’s rand and Brazil’s real were among the biggest gainers in emerging-market currencies, jumping at least 2.9 percent. Currencies from other commodity-producing nations also strengthened. Australia’s dollar advanced 1.2 percent after the nation’s jobless rate unexpectedly declined, while New Zealand’s currency strengthened 1.8 percent after fourth-quarter economic growth beat projections.

“In the very short term, risk currencies -- Asia, commodity currencies -- will do well as other risk assets including stocks and oil benefit from the Fed’s dovish stance,” said Mansoor Mohi-uddin, senior markets strategist in Singapore at Royal Bank of Scotland Group Plc. The more interesting trend will be how other central banks respond in the next few weeks, he said.

The British pound rose 1.6 percent versus the dollar after the Bank of England left interest rates unchanged on Thursday and maintained current stimulus levels. The Norwegian krone appreciated 1.6 percent after a cut in borrowing costs.

The S&P 500 added 0.7 percent, with the measure 0.2 percent away from wiping out losses for the year. The Dow jumped 0.9 percent. Caterpillar Inc. jumped 2.1 percent, helping boost industrial shares even after a first-quarter outlook that was well below analysts’ estimates. Mondelez International Inc. slid 2.3 percent after Pershing Square Holdings Ltd., the publicly traded security of Bill Ackman’s activist hedge fund, cut its stake.

A report today showed fewer Americans than forecast filed applications for unemployment benefits last week, illustrating the Fed’s view of a stronger labor market.

The Stoxx Europe 600 Index lost 0.1 percent, as the euro rose against the dollar. A gauge of lenders fell for a third day, led by Banco Popolare SC. Glencore Plc and BHP Billiton Ltd. rallied, boosting a gauge of commodity producers.

The Bloomberg Commodity Index, which measures returns on 22 raw materials, climbed as much as 2.2 percent and posted its highest close since Dec. 4.

All six metals advanced on the London Metal Exchange, supported by a weakened U.S. currency. Copper for delivery in three months jumped 2.7 percent to the highest level since November, as exchange inventory fell 3.7 percent, the biggest decline since May 2014.

West Texas Intermediate added 4.5 percent to $40.20, its highest settlement since Dec. 3. U.S. output slid to the lowest level since November 2014 and inventories expanded by 1.3 million barrels, the smallest increase in five weeks, data showed Wednesday. Major oil-producing nations plan to meet April 17 in Doha to discuss a commitment to freezing output, Qatar’s energy minister said.

Emerging Markets
The MSCI Emerging Markets Index of stocks jumped 3.6 percent, rising a second day. Benchmarks in Russia, Dubai, Abu Dhabi and South Africa advanced at least 1 percent amid gains in raw-material prices.

The Hang Seng China Enterprises Index of mainland stocks listed in Hong Kong climbed 2.4 percent to a two-month high and the Shanghai Composite Index rose 1.2 percent.

A gauge of 20 developing-nation currencies climbed for a second day, rising 1.5 percent. The index is up 3.8 percent since Dec. 31, heading for its biggest quarterly gain since 2012, led by rallies in Russia’s ruble and Brazil’s real. 

Government bonds climbed after the Fed’s dovish tone. The yield on the 10-year Treasury note fell one basis point to 1.90 percent.

Italy’s 10-year bond yield fell six basis points to 1.27 percent, while benchmark German 10-year bund yields slid eight basis points to 0.23 percent. The yield on U.K. 10-year gilts lost seven basis points to 1.45 percent.

Source: Bloomberg News