Dollar slumps to 15-month low as risk-on mood continues

The risk-on mood in markets stretched into another day as stocks climbed and the dollar weakened to a 15-month low. 

European shares extended Wednesday’s rally, which saw the Stoxx 600 Index surge 1.5%. Swatch Group AG, the maker of Omega and Longines watches, jumped more than 6% as China’s reopening fueled a rise in profits. Watches of Switzerland Group Plc, the biggest retailer of Rolex watches in the UK, soared 10%. US equity futures rose after solid gains on Wall Street.

Investors are piling back into equities as concerns over higher interest rates and a potential recession ease. The European benchmark is in the midst of its longest rising streak since mid-April and has almost erased its second-half losses. Data Wednesday showed the US inflation rate slid to a two-year low, while a report on US producer prices due later today is expected to show a decline from a year ago. 

“The US CPI data raises hopes that the Federal Reserve is going to be able to bring down inflation without steering the US economy into a recession,” said Nigel Green, the CEO of DeVere Group, who sees opportunities in tech and infrastructure-related stocks as the economy recovers. “We believe the Fed has pulled off the perfect soft landing.”

The MSCI Asia Pacific Index headed for the highest close in more than three weeks, with stocks in Hong Kong recording some of the biggest gains. Chinese Premier Li Qiang met with senior executives from firms including Alibaba Group Holding Ltd. and ByteDance Ltd., a sign that the government is ending its crackdown on the technology industry.

Some top money managers said the dollar is poised for further losses as US exceptionalism wanes. Hedge funds turned net sellers of the dollar for the first time since March, according to data from the Commodity Futures Trading Commission aggregated by Bloomberg. 

“The recent USD underperformance reflects a qualitative shift in market comfort with being short USD as the terminal Fed policy rate looks increasingly capped,” Steven Englander, head of global G-10 FX research and North America strategy for Standard Chartered Bank, wrote in a note.

The British pound extended its rally to a sixth day, staying above the $1.30 level that it hit Thursday for the first time since April 2022, after data showed the UK economy shrank less than expected in May.

Bond yields were broadly lower as investors unwound bets that the Fed would raise rates again following an expected hike this month. The yield on two-year Treasuries, which is more sensitive to imminent policy moves, dropped around six basis points to 4.68% after sliding 13 basis points Wednesday on the inflation data. Germany’s 10-year yield dropped eight basis points to 2.49%.

The US consumer price index slid to 3% in June year-on-year, down from 4% in May. The core measure — which economists view as the better indicator of underlying inflation — dropped to 4.8%, the lowest since 2021. While traders predict the Fed will still go ahead with one more rate hike this month, the likelihood of further increases appears to be receding.

Brandywine Global Investment Management expects the Fed to tighten by 25 basis points this month and then pause. “We’ve moved beyond that sort of crisis mentality around inflation,” portfolio manager Jack McIntyre told Bloomberg Television. “The rhetoric coming from the Fed post-FOMC should be a lot less hawkish.”

Key events this week:

• Eurozone industrial production, Thursday
• US initial jobless claims, PPI, Thursday
• US University of Michigan consumer sentiment, Friday
• US banks kick off earnings, Friday

Some of the main move in markets:

Stocks

• The Stoxx Europe 600 rose 0.4% as of 9:53 a.m. London time
• S&P 500 futures rose 0.4%
• Nasdaq 100 futures rose 0.6%
• Futures on the Dow Jones Industrial Average rose 0.2%
• The MSCI Asia Pacific Index rose 1.7%
• The MSCI Emerging Markets Index rose 1.4%

Currencies

• The Bloomberg Dollar Spot Index fell 0.3%
• The euro rose 0.3% to $1.1163
• The Japanese yen rose 0.1% to 138.36 per dollar
• The offshore yuan was little changed at 7.1664 per dollar
• The British pound rose 0.4% to $1.3045

Cryptocurrencies

• Bitcoin rose 0.2% to $30,417.96
• Ether was little changed at $1,874.3

Bonds

• The yield on 10-year Treasuries declined four basis points to 3.81%
• Germany’s 10-year yield declined eight basis points to 2.49%
• Britain’s 10-year yield declined seven basis points to 4.44%

Commodities

• Brent crude rose 0.4% to $80.43 a barrel
• Spot gold rose 0.2% to $1,961.13 an ounce

This story was produced with the assistance of Bloomberg Automation.

--With assistance from Ruth Carson and Tassia Sipahutar.