The dollar sold off and Treasuries rallied on Thursday after a closely watched inflation reading came in lower than expected and a speech by Jay Powell raised hopes that the Federal Reserve would soon slow its rate hikes.
A measure of the dollar against half a dozen peers fell 1.2 percent. The pound rose 1.5 percent to $1.224, while the euro gained 1.1 percent and the Japanese yen 2.1 percent.
The dollar’s decline on Thursday is the latest sign that market expectations are changing for the path of Fed rate hikes – a theme that has dominated global markets this year.
“The market takes the view that inflation is history and that the Fed will turn around fairly soon and rate hikes will taper off from December,” said Didier Discountu, head of equities at Lombard Odier Investment Management.
The US currency appreciated sharply for most of 2022 as the Fed hiked interest rates more aggressively than most other central banks in a fight against inflation. However, it has fallen since a better-than-expected inflation report last month raised hopes that the Fed would soon slow the pace of hikes.
Those hopes were bolstered by a speech by Fed Chair Powell on Wednesday and fresh inflation data on Thursday.
The US core index of personal consumption spending, the Fed’s preferred indicator of inflation, rose 0.2 percent month-on-month in October, according to data from the Commerce Department. Wall Street had expected an increase of 0.3 percent.
A separate survey by the Institute for Supply Management showed that cost pressures in the US manufacturing industry are cooling at the fastest rate since 2020.
“What we are seeing in the US is that some of the serious drivers of inflation are disappearing, food prices, gas prices and house prices all seem to have peaked,” Rabbu said.
Powell said at the Brookings Institution on Wednesday that “the time for a moderation in the pace of rate hikes may come as early as the December meeting.”
US Treasuries also extended gains after gaining in response to Powell’s speech. The yield on the benchmark 10-year note, which falls when prices rise, fell 0.19 percentage points to 3.51 percent, according to Tradeweb data.
However, equity markets were more subdued. The S&P 500 slipped 0.1 percent after posting its first consecutive monthly gains since 2021. The Nasdaq Composite gained 0.1 percent, while Europe’s regional Stoxx 600 gained 0.9 percent.
Trading in the futures markets shows that investors now expect the Fed to hike interest rates to a peak of about 4.9 percent next year, from a forecast of 5 percent earlier this week and a high of 5 .14 percent in early November.
Investors then expect rates to fall back to 4.4 percent by the end of 2023, despite repeated claims from Fed officials that rates will remain high for some time after they have peaked.
Comments are closed.