The dollar is nearing a 3-month low, and stocks are rallying after the Fed tested the brakes

LONDON (Reuters) – Stocks hit a two-month high and the dollar slid towards a three-month low on Thursday after signals from the Federal Reserve about smaller interest rate hikes from next month were followed by a message from Frankfurt that the European Central Bank would plow.

With Wall Street closed for Thanksgiving, it was up to Europe to continue the rebound in market confidence that had been building for over a month.

It looked like a struggle early on when the FTSE in London refused to budge, but there have been enough gains in the rest of Europe and in Asia overnight to ensure things keep moving forward.

By lunch, the MSCI Index of World Equities (.MIWD00000PUS) was at its highest since mid-September, while German and British government bond yields, which drive Europe’s borrowing costs, fell to their lowest since October and September, respectively.

“The Fed meeting minutes indicated that some reasonable voices are trying to drown out Fed Chair Powell’s ‘hike, climb, lift’ chant,” said Paul Donovan, chief economist at UBS.

The minutes released on Wednesday showed that a “significant majority” of federal policymakers agreed that it “will likely soon be appropriate” to slow the pace of rate hikes, although Donovan noted there was no sign of an actual halt yet and many Fed members believe interest rates may need to rise “somewhat” more than expected.

Futures markets are showing that investors now see US interest rates peaking just above 5% by May, and that there is about a 75% chance that the Fed will now turn to 50 basis point hikes instead of 75. Basis that he used recently.

Minutes from the ECB’s equivalent meeting on Thursday showed that interest rate setters fear that inflation may now take hold in the eurozone.

“The data received so far suggests that there is still limited scope for slowing the pace of interest rate adjustments, even as we approach ‘neutral’ rate estimates,” Isabelle Schnabel, one of the most influential members of the Executive Board, said separately.

For the currency markets, that meant a continuation of the 7-week sell-off in the dollar. / frx

The euro rose to a high of $1.0447, bringing it close to a four-month high of $1.0481, while the dollar fell 0.6% against the Japanese yen to 138.70 yen and crossed $1.20 against the pound sterling.

“The dollar could remain under pressure for a little while longer, but it likely includes a significant amount of negativity associated with the Federal Reserve now,” the analysts at ING wrote.

March global markets in november

Turkey thanks

The Fed wasn’t the only focus. The Swedish crown rose as the central bank raised interest rates by three-quarters of a percentage point to 2.5% and signaled more next year. Read more

Germany’s closely followed Ifo business climate index rose more than expected, following some upbeat data from France as well, while Turkey surprised no one as it cut another 150 basis points in interest rates despite high inflation of over 85%.

Turkey’s central bank said it marked the end of cuts, but next year’s presidential election raises doubts about the lira’s fall to a new record low.

Turkey’s real returns

Overnight, Asian markets saw Japan’s Nikkei (.N225) and South Korea’s Nikkei (.KS11) both up around 1%.

The Bank of Korea lowered the pace of interest rate increases to 25 basis points. In Japan, data showed that manufacturing activity contracted at the fastest in two years.

Shares of Chinese real estate (.HSMPI) also rose nearly 7%, after banks there pledged at least $38 billion in new lines of credit for cash-strapped developers, although the Shanghai Composite Index (.SSEC) lost ground. 0.25% as COVID cases in the country continue to rise.

In the oil market, prices have been falling towards a key support level set in September. If they break through, oil could drop to levels not seen since late 2021.

Brent crude futures fell 0.3 percent to $85.13. US crude oil futures fell 0.2% to $77.74 a barrel. It had fallen more than 3% on Wednesday as the Group of Seven (G7) countries considered a ceiling on the price of Russian oil above the current market level.

Recession fears remain severe. Post-Fed US bond market moves on Wednesday saw 10-year yields drop to a huge deficit of 79 basis points compared to the two-year yields.

Such an inversion of the curve has not been seen since the dotcom crash of 2000 and, on the face of it, is a sign that investors expect a deep economic downturn in the coming months.

Additional reporting by Stella Keough in Sydney. Editing by Robert Purcell and William Maclean

Our Standards: The Thomson Reuters Trust Principles.

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