The dollar sat at a more-than-one-year low while stocks climbed yesterday as investors bet that subdued US inflation and strains in Washington would limit Federal Reserve interest rate moves for the rest of the year.
The Fed started a two-day meeting yesterday to discuss its monetary stance and the timing of its long-awaited balance sheet reduction, a plan most likely to be detailed in September.
There is a growing sense that it will want to tread carefully, and markets were reflecting that. They were also boosted by “euphoric” German economic data and Greece’s first return to capital markets since 2014.
With US stock markets beginning the day at or near their all-time highs, volatility was in deep hibernation with the so called “fear gauge” – the VIX index – at a 24-year low and only lower twice in its 25-year history.
The US currency was stuck at its lowest since June 2016 after a near four per cent drop over the last month and more than eight per cent fall this year.
Against the yen, the dollar did manage to put up a bit of fight, edging up to 111.380 yen having slipped as low as 110.625 yen – its lowest since mid-June – the previous day.
The euro yesterday got a boost as German business morale hit a new high, with firms “euphoric” according to the Munich-based Ifo economic institute that compiles the data from 7,000 of them in Europe’s largest economy.
“Hardly anything seems to be able to hit the German economy,” Ifo economist Klaus Wohlrabe added, saying with reference to the euro’s recent sharp rise that German business was experienced in managing the impact of exchange rate moves.
The IMF also was expected to give an upbeat euro zone report later. Greek government borrowing costs hovered near their lowest level since 2010, meanwhile, as the country sold its first longer-dated bond in three years at 4.625 pct.
Some five years since European Central Bank Mario Draghi pledged to do “whatever it takes” to preserve the euro, the debt sale by Greece was the clearest sign yet of the bloc’s recovery from its crippling debt crisis.
It spurred demand for other low-rated debt, with bonds of Portugal and Spain outperforming those in powerhouse Germany and the gap between Italian and German 10-year yields dropping to its smallest since December 2016.
In commodities, oil prices extended their recovery on a pledge by leading Opec producer Saudi Arabia to cut exports in August to help reduce the global crude glut. Halliburton Co’s executive chairman also said the US shale drilling boom would probably ease next year.
US crude jumped 1.6 per cent to $47 a barrel, after closing up 1.25 per cent on Monday. Global benchmark Brent added 1.55 per cent to $49.35, extending Monday’s 1.1 per cent rise.