Dollar, treasuries rise amid Fed reality check

The U.S. dollar and Treasuries advanced as investors weighed the Federal Reserve’s patience with interest-rate hikes against the risk of persistent inflation and slowing global growth.

The U.S. dollar and Treasuries advanced as investors weighed the Federal Reserve’s patience with interest-rate hikes against the risk of persistent inflation and slowing global growth. 

The dollar gained against all Group-of-10 peers except the Japanese yen, while pushing the euro ever closer toward its year-to-date lows. The 10-year U.S. yield shed four basis points. Equities continued to defy bond-market caution, sending a gauge of global stocks to a record thanks to rallies in Europe and Asia. Futures on the Nasdaq 100 index climbed 0.4 per cent.

While announcing a stimulus-tapering plan as expected, Fed policy makers reaffirmed they’re in no hurry to increase benchmark rates even though inflation may run hot for months. While that supported risk-taking in stock markets, a second-day reality check appeared to have emerged in the bond and currency markets. A tug-of-war looked set to continue between dovish central banks and markets pricing in quicker-than-expected rate hikes. 

The Fed “may not be moving any more swiftly than expected to the exit from emergency levels of policy accommodation, but it is still exiting,” Ryan Wang, a U.S. economist at HSBC Holdings Plc, wrote in a note. “This should be enough to support the dollar against a number of currencies where central bank guidance is more overtly dovish. The continued moderation in global activity is also likely to support the USD.”

The European Central Bank added to the policy-maker narrative of inflation being a temporary shock from post-pandemic demand surge. President President Christine Lagarde said Wednesday the monetary authority was “very unlikely” to hike rates next year.