US dollar retreats and shares rise in response to Fed move

The US dollar has sounded the retreat on all fronts after the Federal Reserve dialled back expectations for rate rises this year, boosting emerging market currencies and dragging the euro and yen higher.

The Fed’s shift in 2016 rate expectations, from four quarter-point interest rate rises to two, prompted a significant dollar sell-off in the Wednesday US session, a trend that continued into Thursday.

The move also drove shares higher. The S&P 500 was up 0.9 per cent at 2,045 in early afternoon trading on Thursday, putting it up 0.07 per cent on the year. At its trough on February 11th, it was down as much as 11.4 per cent since the start of the year and had lost about $2 trillion of market capitalisation. The Irish ISeq index remains over 9 per cent down on its level at the start of the year.

Recent evidence the US economy is in better shape than thought, an injection of fresh monetary stimulus by central banks in Europe and Japan, a stabilisation in oil prices and Wednesday’s dovish Fed statement has given financial markets a fresh jolt of optimism.

West Texas Intermediate, the US oil benchmark, topped $40 a barrel for the first time since December on Thursday. It traded as low as $26.05 a little more than a month ago. The Dow also turned positive for the year.

Concern about a slowing global economy, led by China, was the catalyst for selling in January, which at one point drove stocks to their worst ever start to the year.

Many of those worries remain. The International Monetary Fund has warned the world faces the “risk of economic derailment” and needs immediate action to boost demand.

The rally since the S&P 500’s post-Lehman low has been remarkable by any standard

Bank stocks, whose performance has been seen as an important factor driving the market’s future performance, were up about 1 per cent on Thursday afternoon, with Bank of Ireland and Permanent TSB among the gainers. Spillover fears from the European banking sector and frustration at the slow pace of interest rate increases in the US have buffeted the financial sector this year. Rate hikes mean banks can earn more on the money they lend versus what they take in as deposits.

As the US session got going both the euro and yen were more than 2 per cent higher on the dollar since the Fed statement. The euro comfortably breached $1.13, its highest level since February 12th, while the dollar dipped below Y111. The euro rise will not please the European Central Bank (ECB), which wants to see the currency weaken to boost euro zone inflation.

The dollar index, which tracks the world’s reserve currency against six of its main rivals, fell on Thursday to levels last seen in October.

The Fed’s statement and chair Janet Yellen’s press conference – more dovish than expected – led Société Générale FX strategist Kit Juckes to conclude that the central bank “has no interest in pushing the dollar higher”.

After the Bank of Japan and ECB tried to weaken their currencies by driving rates lower, the prospect of a stronger dollar relied on a more hawkish Fed that the market expected, “and that is clearly not happening”, Mr Juckes said.

– (Copyright Financial Times Limited )