The US dollar slipped against leading currencies on Wednesday, influenced by a decline in Treasury yields from their recent highs, with investors awaiting minutes of the Federal Reserve's latest policy meeting for clues on the path of interest rates. According to The Economic Times, the dollar index, which measures the US currency against six major peers, was down marginally at 99.65. The euro inched higher to $1.1577, remaining close to the two-month high touched earlier this week, while sterling was little changed at $1.3533, holding near a three-month high ahead of British inflation data due later on Wednesday. The Japanese yen was little changed at 159.56 per dollar, having given back much of its intervention gains, but it is still well off a multi-decade low of about 164. A selloff in US Treasuries appeared to have paused amid a week light on economic data or other obvious catalysts.
Market expectations for Federal Reserve rate hikes have collapsed dramatically following the employment and retail sales data. As reported by Reuters, traders now expect a 35% chance of a Fed rate increase at the September meeting, compared with 52.2% a week ago, according to the CME FedWatch tool. This represents the lowest reading since the Fed's June decision. The shift reflects trader skepticism about the Federal Reserve's ability to continue tightening monetary policy amid weakening economic conditions. Markets are now pricing in a 35% chance of a Fed move next month, down from about 55% a week earlier, while the odds of a move by December stand at 69%. The Fed's July decision was not unanimous, with a 9-3 vote keeping rates at 3.50% to 3.75%. However, the likelihood of at least one 25 basis point rate hike prior to year-end currently stands at 65%, according to the CME's FedWatch Tool. Investors are now awaiting the minutes of the Fed's July meeting and comments from Chairman Kevin Warsh at the annual Jackson Hole symposium for further clues on the policy outlook.
Despite dollar weakness, Treasury yields eased from recent multi-year highs as investors awaited the Federal Reserve's policy guidance. According to The Economic Times, the yield on the benchmark US 10-year Treasury note extended declines and was last at 4.702%, while that on the 30-year bond fell to 5.282%. This represents a significant retreat from the 30-year bond yield's high of 5.3103%, which was the highest since 2007. Market participants now turn to the Federal Reserve's release of minutes from the most recent meeting of its monetary policy-setting Federal Open Market Committee, looking for clues as to policymakers' views on interest rates. Harvinder Kalirai, chief global fixed income and currency strategist at Alpine Macro, noted that "If the Fed does not follow through with the rate hikes that are being discounted, the upside for bond yields should be very limited here."
Oil prices surged to near three-week highs amid escalating tensions in the Middle East, keeping inflation risk alive for investors. According to The Economic Times, US President Donald Trump said on Tuesday there were no talks with Iran and insisted the Strait of Hormuz was open, contradicting Iran's assertion that the waterway remained shut to shipping. This stalemate in the Middle East lifted oil prices, with US crude rising 2.74% to $84.66 a barrel and Brent rising to $90.81 per barrel, up 2.59% on the day. The oil price surge reflects concerns over potential supply disruptions and their impact on global inflation dynamics.
US stock index futures were mixed in early European trade, despite an all-round positive performance during the Asian-Pacific session. According to Reuters, the Dow Jones Industrial Average fell 0.51%, the S&P 500 dropped 0.52% and the Nasdaq Composite was down 0.31%. This morning's gains for individual equities were concentrated in the tech space, with notable performances from Micron Technology up 3.5%, Marvell Technology (+2.8%), Advanced Micro Devices (+1.3%) and Intel (+2.4%). Stocks were dented as investors waited for quarterly reports from large retailers to give information about the health of the US consumer. The key data release is August's S&P Purchasing Managers' Indices (PMIs), which will show whether the mid-year pickup in US business activity is holding up. Earnings are lighter this week but include reports from Home Depot, Target and Walmart, which investors will watch closely for signs of consumer strength.
