The dollar held just off nine-month lows against the euro and a group of other currencies, after a slew of Federal Reserve officials laid out the case for a downshift in the US central bank’s rate-tightening campaign, while concerns about a potential economic downturn weighed on equities.
Investors are increasingly contrasting the US picture with a relatively rosier outlook for Europe, which many reckon will manage to dodge recession this year. Forecasts of a US recession in the second half of 2023, the ongoing wrangling in Congress over the debt ceiling and signals from companies weighed on equity index futures, which struggled to build on the momentum that lifted S&P 500 after four days of losses.
Europe’s Stoxx 600 benchmark was steady, having risen nearly 7% this year, almost double the S&P 500’s gain. Meanwhile, the euro strengthened to the highest since April 2022. The single currency is up almost 2% this year against the greenback, after falling nearly 6% last year.
Markets have seized on latest comments from Fed officials, especially from Governor Christopher Waller, who said policy looked pretty close to sufficiently restrictive and he backed moderation in the size of rate increases.
By contrast, European Central Bank policymakers Klaas Knot and Peter Kazimir spoke in favour of continuing with half-point interest-rate increases at the next two meetings, adding to the hawkish comments made last week by fellow ECB officials.
The diverging rate bets pressured the dollar, which stayed just off nine-month lows against a basket of peers. Pressure on the greenback has increased after last week’s weak retail sales data and a slump in business equipment production reinforced the challenges for the world’s biggest economy.
In premarket moves on Wall Street shares in enterprise software giant Salesforce rose on news of a substantial stake purchase by hedge fund Elliott Investment Management. Western Digital shares also gained after a Bloomberg report that the company and Kioxia are progressing in their merger talks.
Equity investors will now watch for signals from the earnings season. While oil-field giant Schlumberger Ltd. and financial services provider State Street Corp. beat forecasts last week, analysts expect fewer earnings beats this season than normal. Tech stocks also face a key test after they outperformed the broader market, mainly on back of hefty job cut announcements.
Earlier, Asian shares enjoyed a strong session, albeit in holiday-thinned trade, with Japan’s Topix index up as much as 1%. The yen also gained 0.5% against the dollar.
Japanese 10-year yields slipped after the central bank acted to stem the rise in bond yields by offering banks ¥1 trillion yen ($7.7 billion) of collateralized loans. Yields held aroumd 0.375%, well below policymakers’ 0.5% ceiling.
Elsewhere, oil rose on the back of a weaker dollar and expectations of rising energy demand in the wake of China’s reopening.
The Stoxx Europe 600 rose 0.2% as of 8:42 am London time and S&P 500 futures were little changed.
While Nasdaq 100 futures were little changed, futures on the Dow Jones Industrial Average were little changed and the MSCI Asia Pacific Index rose 0.5%. The MSCI Emerging Markets Index rose 0.2%.
The Bloomberg Dollar Spot Index fell 0.2% and the euro rose 0.4% to $1.0895.
While the Japanese yen fell 0.1% to 129.76 per dollar, the offshore yuan rose 0.1% to 6.7723 per dollar and the British pound rose 0.1% to $1.2414.