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Cautious Fed bets keep dollar glum, stocks strong

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LONDON: The dollar sagged to a more than one-year low and European stocks climbed on Tuesday, as investors bet that subdued US inflation and political strains in Washington would limit Federal Reserve interest rate moves for the rest of the year.


The Fed starts a two-day meeting later in the day 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 with cautious risk appetite in Europe, where sentiment also got a boost from “euphoric” German economic data and news that Greece was tapping capital markets for the first time since 2014.


Strength among commodity firms and banking stocks as well as a string of solid updates also boosted European shares as the euro, the pound and the region’s other main currencies took advantage of the soft dollar.


Emerging markets stocks and some currencies softened a touch on Tuesday as a tepid dollar and higher oil and commodity prices held back risk appetite in the run up to a meeting of US Federal Reserve policy makers.


MSCI’s emerging market benchmark weakened 0.2 per cent, pulling back from the 27-month high hit on Monday as losses across Asia weighed on the index, which has rallied ten out of eleven previous session.


Stocks in South Africa gained 0.7 per cent while Turkish peers rose 0.4 per cent. But the gains failed to make up for heavyweight South Korea, which closed 0.5 per cent lower as offshore investors took profit.


China’s bluechip index slipped 0.6 per cent with fresh talk by Beijing about preventing systemic financial risk reigniting fears of tighter regulations.


The US currency was stuck at its lowest since June 2016 to add to a near 4 per cent drop over the last month and more than 8 per cent this year.


The political troubles of President Donald Trump’s White House continue to mount, with investigations into his pre-election links to Russia deepening. There is also growing anxiety about the United States hitting another debt ceiling in October with few moves to potentially offset that.


“We may seem some consolidation here from the dollar but fundamentally our bearish view on it remains,” UniCredit Global Head of FX Strategy Vasileios Gkionakis said.


“What the Fed says tomorrow is the million dollar question... but the risk is that they sound a bit more cautious after the fourth consecutive downside surprise in inflation.”


The debt ceiling issue has started to cause problems at Treasury bill auctions and the three-month T-bill yield rose above the 6-month equivalent late on Monday to account for the outside risk of a technical default.


Against the yen, the dollar eased to 111 yen having slipped as low as 110.625 yen, its lowest since mid-June, the previous day. Analysts see it sliding under 110 if the Fed shows signs of serious concern this week.


The greenback was also lower against the euro again at $1.1652, having hit a near two-year low earlier in the week of $1.1656.


The single currency got a further boost as German business morale hit 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 German business was experienced in managing the impact of exchange rate moves following the euro’s sharp rise.


— Reuters


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