Dollar, Treasury yields jump on Fed jolt as Trump speech looms

SINGAPORE, March 1 (Reuters) – The dollar and Treasury yields jumped on Wednesday after Federal Reserve officials jolted traders by suggesting an interest rate rise may be imminent even as markets remained on tenterhooks ahead of a looming speech by U.S. President Donald Trump.

Stock markets in Asia were also pulled lower, with MSCI’s broadest index of Asia-Pacific shares outside Japan off almost 0.3 percent in early trade.

Japan’s Nikkei soared 1.1 percent, buoyed by a weaker yen.

Australian shares were off 0.3 percent, slightly paring losses as gross domestic product data confirmed the economy returned to growth in the fourth quarter.

U.S. 2-year Treasury yields jumped to 1.2999, their highest level since Dec. 15, after New York Fed President William Dudley, among the most influential U.S. central bankers, said overnight on CNN that the case for tightening monetary policy "has become a lot more compelling" since Trump’s election.

John Williams, president of the San Francisco Fed, added to the hawkish message, saying he saw no need to delay a rate hike with the economy at full employment, inflation headed higher, and upside risks from potential tax cuts waiting in the wings.

Williams doesn’t have a vote this year but remains influential among his colleagues.

U.S. 10-year Treasury yields also climbed to 2.4203 on Wednesday.

"Yesterday’s speeches from Fed (policymakers) reinforced market suspicions that a rate hike at the Fed’s March meeting is a live option," Ric Spooner, chief market analyst at CMC Markets, in Sydney, wrote in a note.

Traders now see a better than 62 percent chance of a rate increase in March from the current level of 0.5 to 0.75 percent, a surge from 31 percent earlier, according to CME Group’s FedWatch tool.





The sharp shift came despite disappointing U.S. fourth-quarter gross domestic product growth, as downward revisions to business and government investment offset robust consumer spending.

With a March rate hike now appearing more likely despite the slowdown, markets are focusing on Trump’s address to a joint session of Congress on Tuesday evening in the United States, watching for details on his fiscal stimulus, tax cuts and deregulation plans.

Trump’s speech is slated to begin at 0200 GMT.

"The key still remains Donald Trump’s planned policies… The market has so far remained patient with little actual details of these policies revealed," James Woods, global investment analyst at Rivkin in Sydney, wrote in a note.

"In the near-term the biggest threat to new all-time highs for equity markets is failure to provide further details on these policies."

Nervousness about what details, if any, will be forthcoming have weighed on U.S. markets, with Wall Street posting losses on Tuesday. The Dow Jones Industrial Average snapped a 12-day winning streak to close down 0.1 percent, while the S&P 500 ended down 0.26 percent and the Nasdaq dropped 0.6 percent.

The dollar index, which tracks the greenback against a basket of trade-weighted peers, jumped 0.35 percent to 101.47 on Wednesday.

The dollar also advanced 0.35 percent on the yen to 113.14 yen.

The Australian dollar reversed earlier losses to trade fractionally higher at $0.7659 after data showed gross domestic product beat expectations to grow 2.4 percent from a year earlier.

In Asia, markets are also awaiting data on manufacturing activity for February across major economies including Japan, China, Indonesia and India.

Data releases later in the session include German unemployment for February, and U.S. personal consumption expenditure, inflation and manufacturing activity.

In commodities, oil prices slipped on concerns about rising U.S. crude inventories.

U.S. stockpiles have risen for seven straight weeks, overshadowing production cuts by the Organization of Petroleum Exporting Countries.

U.S. crude retreated 0.1 percent to $53.93 a barrel.

The stronger dollar weighed on gold, which slid 0.2 percent to 1,245.74 an ounce, extending Tuesday’s 0.3 percent decline.

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