Global equity markets traded slightly lower yesterday while the dollar and US Treasury yields eased on a growing view that the Federal Reserve will need additional positive data before it decides to scale back its economic stimulus.
The euro hit a six-week high against the dollar as traders reconsidered whether the Fed would trim its monthly purchases of $85 billion in bonds at its two-day meeting next week.
Even if the Fed were to signal a pullback in bond purchases, policymakers will likely opt for a small one to prevent a bond market sell-off, which would send long-term interest rates higher and hurt the US housing market.
“We might see a gradual tapering. The Fed won’t let rates go much higher,” said Larry Milstein, head of government and agency trading at R.W. Pressprich & Co. in New York.
At the same time, increased speculation that a banking union with the power to close failing banks will be created in the eurozone before the end of 2014 lifted the euro.
European Union finance ministers meeting in Brussels were likely to take a step towards creating a banking union yesterday, but leaving nagging legal details to another time, perhaps next week.
A banking union is widely viewed as crucial to shore up the eurozone against future debt and financial crises.
“There’s some expectation that a deal may be reached before year-end, and that is supportive of the euro,” said Sireen Harajli, currency strategist at Mizuho Bank Ltd. in New York.
The euro gained for a sixth straight day versus the greenback and was within sight of this year’s high of $1.3832. It last traded down 0.2 per cent 1.3765.
The euro’s rise caused the dollar index to extend losses into a second straight day. It fell to six-week lows, dragged down by lower US Treasury yields, as investors mostly downplay the prospect of a reduction in the Fed’s asset purchases this month.
The dollar index was down 0.19 per cent at 79.982
The 10-year Treasury note was 12/32 higher in price to yield 2.8116 per cent.
European shares slipped, weighed down by major Swiss stocks as a rally in the Swiss franc raised fresh concern about the country’s exports.
The pan-European FTSEurofirst 300 index closed down 0.74 per cent at 1,262.98.
The Dow Jones industrial average fell 29.64 points, or 0.18 per cent, at 15,995.89. The Standard & Poor’s 500 Index was down 3.47 points, or 0.19 per cent, at 1,804.90. The Nasdaq Composite Index was down 4.17 points, or 0.10 per cent, at 4,064.58.
Brent crude for January was down 21 cents at $109.18 a barrel. Brent dropped two per cent on Monday, its biggest loss in five weeks.
But US crude oil was higher on news of progress toward the opening of a major pipeline that will transport oil from the US Midwest to the Gulf, helping drain surplus crude at the pricing point for the futures contract.
US light crude futures for January were up 96 cents at $98.30 a barrel.