The dollar slumped on Thursday, October 12, after the U.S. Federal Reserve showed a more guarded view towards inflation, but that did not derail a rally in stock markets that pushed Asian shares to their highest in a decade.
Against a basket of six major currencies, the dollar wallowed at its lowest in more than two weeks after minutes from the Fed’s September meeting showed policymakers had a prolonged debate about the prospects of a pickup in inflation and the path of future interest rate rises if it did not.
While this did not cool market expectations for a hike in December – which stand at around 80 percent, according to CME’s FedWatch tool – it did make investors re-evaluate the long-term path for policy in the world’s largest economy.
“We just had the minutes and saw there was a slightly more dovish take, so there is this ongoing debate about the lack of inflation momentum in the U.S.,” said Benjamin Schroeder, senior rates strategist at ING.
European government bond yields fell broadly in step with U.S. peers, a trend led by Italian yields which were near a three-week low after the government in Rome won support for electoral change likely to penalise the anti-establishment 5-Star Movement.
U.S. and German 10-year yields fell 2 basis points to 2.32 percent and 0.44 percent, respectively, while Italian yields were down 4 basis points at 2.13 percent.
Reports that a market-friendly candidate was being pushed as successor to Janet Yellen at the helm of the Fed helped major stock indexes on Wall Street close at yet another record high on Wednesday.
Asia followed suit on Thursday with MSCI’s broadest index of Asia-Pacific shares outside Japan up 0.7 percent and at its highest since December 2007.
Japan’s Nikkei was up 0.4 percent after brushing 20,994.40, its highest since November 1996. South Korea’s KOSPI added 0.55 percent to mark a fresh record peak and Hong Kong’s Hang Seng scaled a decade-high.
The yen was up 0.2 percent against the dollar, finding support after a media survey showed that Japanese Prime Minister Shinzo Abe’s ruling party could come close to keeping its two-thirds “super” majority in an Oct. 22 lower house election.
The Mexican peso was up slightly at 18.695 pesos per dollar . That added gains of 0.7 percent overnight as it pulled away from a five-month low, although the currency was seen coming under renewed pressure if the ongoing North American Free Trade Agreement (NAFTA) talks run aground.
The United States, Mexico and Canada have negotiated this week to reform NAFTA. There are concerns that U.S. President Donald Trump could opt to withdraw from the pact if his demands for more favourable treatment are not met.
The Canadian dollar also rose against the greenback, extending overnight gains to reach C$1.2440 per dollar, its strongest in two weeks.
