Dollar on retreat, appetite for risk up

‘Markets will remain shaky’

THE DOLLAR retreated yesterday as global equity markets tried to find their footing after last week’s rout, reviving investors’ appetite for riskier assets.

Still, many market players are not convinced the worst is over, with US bond yields stuck at elevated levels ahead of today’s US consumer price data that could rekindle worries about inflation.

“I think markets will remain shaky until (Federal Reserve chairperson Jerome) Powell’s congressional testimony on February 28. Markets will try to test him until they hear his thinking,” said a trader at a US bank.

The dollar’s index against a basket of six major currencies fell 0.3 percent to 89.923 points, edging further away from Thursday’s half-month high of 90.569 points. The euro traded at $1.2290, bouncing off last week’s low of $1.2206, though it was still more than 2 cents below its three-year high of $1.2538 hit on January 25.

Buying the euro was one of the popular trades earlier this year on the view that the European Central Bank will scale back its stimulus later this year on the back of a strong recovery in the euro zone economy.

Although many market players remain bullish on the euro in the long term, the currency lacks fresh catalysts for further gains amid uncertainties ahead of Italy’s election in early March.

In Germany, Chancellor Angela Merkel and the leader of the Social Democrats face criticism from within their own parties over a new coalition deal that must still be approved.

The risk reversal spreads for euro/dollar options have widened in favour of euro puts, suggesting investors have grown more cautious about the chances the single currency will fall.

The British pound edged up to $1.3846 from Friday’s low of $1.3764. Despite uncertainties around Brexit, the pound has been propped up by rising expectations that the Bank of England will raise interest rates to curb inflation.

Rising risk appetite initially helped to lift the dollar against the yen, but the upbeat mood quickly disappeared when traders saw Japanese shares failing to maintain hefty gains made in the morning.

The dollar fell more than 0.5 percent to 108.01 yen as the Nikkei erased its 1.4 percent intraday gain to end down 0.7 percent at a four-month closing low.

Global stock markets staged a strong rebound since a brutal sell-off that began late in January on worries about rising inflationary pressure. Higher inflation could prompt the Federal Reserve to tighten its policy faster than expected. Alternatively, if the Fed doesn’t act fast enough and falls behind the curve on policy, it could end up pushing up longterm bond yields. In either scenario, traders worry that US growth could be hampered.

Fears

There were some indications such fears are beginning to subside, with Wall Street shares rebounding strongly on Monday and MSCI’s all-country world index of stock performance rising 1.2 percent.

Still, market players are on guard for more volatility.

The 10-year US bond yield hit a four-year high of 2.902 percent while the 30-year yield rose to 11-month high of 3.199 percent.

“Rise in long-term bond yields lifts mortgage lending costs and is likely to cool the economy,” said Minori Uchida, chief FX analyst at the Bank of Tokyo-Mitsubishi UFJ.

The rand slipped 0.3 percent to trade at R11.96 to the dollar, surrendering early gains made after reports the governing ANC party’s national executive committee had decided to “recall” or remove President Jacob Zuma as head of state.