Dollar Strengthens, Global Stocks Gain
30 August 2016 - 11:01PM
Dow Jones News
By Christopher Whittall
The dollar strengthened and stocks in Europe and Asia mostly
gained as investors continued to digest recent comments from
Federal Reserve officials on the prospects for a U.S. interest rate
increase this year.
The WSJ Dollar Index, which measures the greenback against a
basket of 16 currencies, rose 0.2%, putting it on track for its
third consecutive session of gains. Higher interest rates tend to
make a currency more attractive to investors seeking returns.
Futures markets pointed to a flat opening on Wall Street after
U.S. stocks ended higher Monday on gains in financial stocks. The
Stoxx Europe 600 rose 0.6%, led higher by banking shares.
U.S. monetary policy remains in sharp focus for investors. On
Friday, Fed Chairwoman Janet Yellen and Vice Chairman Stanley
Fischer said the economy is resilient enough to withstand an
interest rate rise this year.
Expectations of U.S. interest rates remaining lower for longer
have helped underpin a rally in riskier assets in recent months in
everything from global stocks to emerging market bonds. Still, some
argue investors will take cheer from signs that the world's largest
economy is robust, particularly given further rate rises are
expected to be gradual.
"We would expect stock markets to look to make gains,
particularly as some of the drags on [company] earnings start to
fade," said John Stopford, head of multiasset income at Investec
Asset Management.
"Part of that is a more stable dollar, part of it is a recovery
in commodity prices and part of it is a recovery in growth."
A stronger dollar has eroded the earnings of U.S. corporations
that sell their goods overseas in recent quarters. More broadly, a
sharp fall in commodity prices late last year and in early 2016
weighed on stock markets, as did concerns over a slump in economic
growth.
While the dollar may climb in the near term on expectations of a
U.S. rate increase, Mr. Stopford expects the buck to remain
range-bound, particularly given the Fed is unlikely to push forward
with an aggressive timetable for rate rises.
The WSJ Dollar Index is hovering around a three-week high.
However, it is down nearly 4% in 2016 as investors have shifted
expectations toward a more gradual pace of U.S. rate rises.
The dollar gained 0.3% against the yen to trade at Yen102.2970
Tuesday, while the euro fell 0.2% against the buck to $1.1169.
The yield on the 10-year U.S. Treasury rose slightly to 1.571%
as prices fell. Gold, meanwhile, slipped 0.2% to $1.324 an ounce.
Higher interest rates tend to encourage investors to move out of
non-yield-bearing assets like precious metals.
The prospect of a rate rise pushed up European banking shares
Tuesday, the worst performing sector this year in the region's
stock markets. The banking subindex of the Stoxx Europe 600 gained
1.6%, but remains down over 22% this year.
However, a fall in commodity shares, the best performing sector
in European stocks this year, kept a lid on gains in the broader
market.
Higher interest rates should boost bank earnings by widening the
gap between what they can charge on loans and what they pay on
deposits. European lenders have been buffeted by a range of factors
this year from negative interest rates to bad loans in Italy's
banking system.
Elsewhere, shares in Apple Inc. fell 1.6% in premarket trade
after the European Union's antitrust regulator demanded that
Ireland recover roughly EUR13 billion in unpaid taxes from the
company.
Investors will now be looking ahead to this Friday's labor
market report, which will likely play a large part in determining
whether the Fed will raise interest rates in September.
Fed Vice Chairman Fischer said on Tuesday in a Bloomberg
television interview that the pace of rate increases will depend on
the performance of the economy.
Nevertheless, some caution against reading too much into one
data point. Kully Samra, managing director at Charles Schwab, said
the August jobs report tends to be heavily revised because of
seasonal adjustments in the education sector around the start of
the school year. Overall, he expects one rate rise before the end
of 2016, but isn't pinning hopes on a move next month.
"The economy is in a strong place -- they're in a strong place
to hike in September -- but given the track record we've seen, I
think it's unlikely," said Mr. Samra, referring to the Fed's
apparent reluctance to raise rates earlier this year in the face of
financial market turbulence.
Stocks in Asia mostly rose Tuesday, with Australia's S&P ASX
200 up 0.2% and Hong Kong's Hang Seng Index climbing 0.9%. Japan's
Nikkei Stock Average ended 0.1% lower as a batch of mixed economic
data weighed on local shares.
In commodity markets, Brent crude oil gained 0.5% to $49.68.
Write to Christopher Whittall at
christopher.whittall@wsj.com
(END) Dow Jones Newswires
August 30, 2016 08:46 ET (12:46 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.