Dollar adrift as investors await clarity on Fed policy

US central bank is scheduled to release its decision on Wednesday

FED chairwoman Janet Yellen: Investors fully expect a rate rise largely because Fed officials have told them to

FED chairwoman Janet Yellen: Investors fully expect a rate rise largely because Fed officials have told them to

 

Asian shares turned mixed on Wednesday, while the dollar was left adrift as investors everywhere awaited clarity on the Federal Reserve’s future path for US policy.

Futures for European bourses pointed to marginal early gains, with the Eurostoxx 50 up 0.1 per cent.

Chinese data showed retail sales and industrial output beat forecasts, but a miss in urban investment reinforced views the world’s second largest economy will start to lose momentum as lending costs rise and the property market cools. The reaction was tepid, with Shanghai stocks easing 0.7 per cent.

Investors dumped stocks partly-owned by Anbang Insurance Group after the company said its chairman was temporarily unable to fulfil his duties.

Moves elsewhere were cautious, with MSCI’s broadest index of Asia-Pacific shares outside Japan up 0.1 per cent, and Japan’s Nikkei down 0.08 per cent.

Wall Street had been in a more confident mood overnight, with major indexes at closing at record peaks. Big tech names, including Microsoft and Facebook, led the S&P 500 tech index higher.

The US central bank is scheduled to release its decision on Wednesday, with a news conference to follow from chairwoman Janet Yellen.

US debt

Investors fully expect a rate rise largely because Fed officials have told them to, so attention will rather be on the outlook for policy and particularly when the central bank might begin to wind down its massive portfolio of US debt.

“The main focus will be on the Fed’s balance sheet policy,” said Michelle Girard, chief US economist at RBS.

“While we expect the formal announcement of a change in its balance sheet policy to be made in September, we do not rule out the possibility that strong guidance regarding the time frame for tapering is delivered sooner.”

While the Fed still has another hike pencilled in for this year, a recent run of soft inflation data has left fund futures implying only a 40 per cent chance of a move by December.

The market’s five-year outlook for inflation has been falling steadily, and currently stands at a seven-month trough of 2.18 per cent. It had spiked as high as 2.52 per cent last November in the wake of president Donald Trump’s surprise election victory.

Fresh knock

The US dollar could do with the help having taken a fresh knock on Tuesday when the head of Canada’s central bank put his own hawkish spin on the outlook for rates there. The US dollar fell as far as C$1.3209, its lowest since February 28th, having shed two cent in as many days.

It also lost ground to sterling after UK inflation data surprised on the high side and amid reports Britain’s ruling Conservative Party is likely to sign a deal on Wednesday to form a minority government.

Against a basket of currencies the dollar barely budged at 96.978. It was little changed on the Japanese yen at 110.06, and the euro at $1.1213.

In commodity markets, oil slipped after industry data showed a surprise rise in crude stocks, and Opec reported an increase in its production despite its pledge to cut back.

Benchmark Brent crude retreated 35 cent to $48.37 a barrel, while US light crude shed 42 cent to $46.04.