US dollar dishes the pain amid sell-off

Investors have pedalled into another cycle of selling as the US dollar tightened its hold on the currency markets, recession fears sapped stocks and bonds suffered more interest rate pain.

Europe’s open was brutal. The STOXX 600 share index dropped nearly 2 per cent from the open, while both the euro and the pound, hammered over the last week by UK debt concerns, slumped 1 per cent.

Government bond markets were braced for German data expected to show consumer prices rising there at the fastest rate since the 1950s. Gilt selling also resumed a day after the Bank of England dramatically intervened in the UK market to try and quell the storm around the government’s spending plans.

“The market wouldn’t mind some stability, it has become a little bit unpredictable,” said Barings Investment Institute’s Chief European strategist Agnes Belaisch.

She said investors were now seeing “incoherence” in the UK with government spending as the BoE tries to rein in inflation, while everywhere else the focus is on how high central banks are prepared to go with interest rates.

Germany’s 10-year government bond yield, the benchmark of the euro zone, jumped to 2.27 per cent, as pacey numbers from the German state of North Rhine-Westphalia pointed to a double-digit inflation figure for the country as a whole later.

The UK 10-year gilt yield, which drives UK borrowing costs, rose 15 bps to 4.16 per cent after falling almost 50 bps the day before due the BoE’s sudden intervention.

UK Prime Minister Liz Truss defended her new economic program that has sent sterling to a record low this week and left the UK’s borrowing costs close to Greece’s – saying it was designed to tackle the difficult situation Britain was now in.

Zooming back out, it was still about the dollar which has crushed currencies virtually everywhere this year.

Speaking with reporters in London on Wednesday, veteran Federal Reserve policymaker Charles Evans gave no indication that any of the recent drama would blow the US central bank off its rate hike course.

“We just really need to get inflation in check,” Evans said, backing lifting the Fed’s rates – now at 3 per cent-3.25 per cent – to a range of 4.5 per cent-4.75 per cent by the end of the year or March.

Thursday’s moves saw the US dollar index, which measures the currency against sterling, the euro and four other peers, rise back towards its recent 20-year high again having had its worst session in 2-1/2 years on Wednesday.

Overnight, China’s yuan had fallen again although it stayed just off recent post-financial crisis lows as China’s central bank said stabilising the foreign exchange market was its top priority.

MSCI’s broadest index of Asia-Pacific shares outside Japan , ended the day virtually flat, although Japan’s Nikkei did manage a near 1 per cent rise. S&P 500 futures pointed to Wall Street falling more than 1.2 per cent later with more Fed policymakers also due to speak.

Oil prices were down again after gaining more than $3 in the prior session, with the strong dollar capping oil demand and concerns over the faltering global economic outlook clouding market sentiment.

Brent crude futures fell 91 cents, or 1 per cent, to $88.41 per barrel, while US crude futures dropped by 80 cents, or 1 per cent, to $81.33 and gold fell 1 per cent to $1,642 an ounce.

Goldman Sachs cut its 2023 oil price forecast this week, citing expectations of weaker demand and a stronger US dollar, but said global supply issues reinforced its long-term view that prices could rise again.

“It’s all a bit of a mess,” said ANZ economist Finn Robinson.

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