Dollar up on mixed central bank views, Middle East risk lifts oil and gold

By Naomi Rovnick and Kevin Buckland

LONDON, TOKYO (Reuters) – European stocks were on track to race ahead of Wall Street on Friday, with exporters’ shares in high demand as the continent’s major currencies dropped against a dollar standing tall on bets the U.S. Federal Reserve would keep interest rates high.

Europe’s broad Stoxx share index, rose 1% in early dealings on Friday as a weak euro flattered the domestic value of exporters’ dollar earnings.

London’s was 0.8% higher, boosted by global mining and oil stocks.

Futures markets implied Wall Street’s share index, which is on track for its second weekly drop, would open flat later in the day. MSCI’s all-country equity index was steady, on course for its second weekly fall after hotter-than-expected consumer price data mid-week forced traders to sharply pull back on U.S. rate-cut bets.

Money market pricing implied investors expect the Fed to reduce its main funds rate by less than 50 bps this year. U.S interest rates are at a 23-year high of 5.25%-5.5% and traders started 2024 betting on about 150 bps of cuts.

“Incoming data suggest that the US economy, inflation in particular, is on a different track than the Fed had envisaged,” Barclays analyst Anshul Pradhan said.

“Investors are starting to wonder if the Fed will be able to cut at all this year.”

The hung near a five-month high following a nearly 1% gain this week against a basket of major peers. [FRX/]. Japan’s yen touched a 34-year low of 153.34 per dollar as traders waited for signs authorities in Tokyo might intervene to strengthen the flailing currency.

The European Central Bank and the Bank of England, meanwhile, are predicted to begin reversing their own historically aggressive monetary tightening efforts sooner, in a trend that has weighed on the euro and sterling this week.

The ECB on Thursday strongly signalled it would lower its main deposit rate from a record 4% in June.

The euro touched a 5-month low of $1.0674 on Friday. Sterling, previously a popular carry trade currency for speculators that believed the BoE would cut after the Fed, slid to $1.2508, also a near five-month low.

Fed officials, by contrast, said on Thursday there was no urgency to ease. Boston Fed President Susan Collins commented that the strength of the economy and an uneven retreat in inflation argued against a near-term push to lower rates.

Long-term U.S. Treasury yields on Friday traded at 4.576%, close to a 5-month high, as the price of the debt fell. Investors in U.S. government debt have since early 2023 banked on gains from falling interest rates. But according to Bank of America, the 10-year annualised return from Treasuries now stands at just 0.6%, a 65-year low.

European bond investors on Friday showed less optimism about ECB cuts than currency and equity traders. Economists have also queried whether the ECB would cut in June but then remain cautious about diverging from Fed policy too much.

The yield on the interest rate sensitive two-year German bond was 7 bps lower on the day at 2.89% but on course for its third weekly rise.

“Beyond June, the ECB is keeping its options open,” Deutsche Bank economists said in a note to clients. “The risk is skewed towards the ECB easing less quickly.”

Elsewhere, MSCI’s broadest index of Asia-Pacific shares outside Japan fall 1%.

Gold climbed to a record $2,395.29, bringing its gains this week to 2.74%.

prices rose after Iran said it would retaliate for a suspected Israeli airstrike on its embassy in Syria.

futures added 0.8%, to $90.43 a barrel, while U.S. West Texas Intermediate crude futures gained 0.9%, to $85.79.

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