Dollar rises as European and Japanese hawks waver By Reuters

A look at the day ahead in US and global markets from Mike Dolan

The US dollar is on course for its best week in six months, rising again on Thursday against the yen, sterling, euro and Swiss franc, as central banks around the world look poised to outdo the Federal Reserve.

Buoyed in part earlier this week by a “safety bid” around Middle East tensions, gains in the dollar were indeed amplified as speculation about another round of interest rate cuts in Europe was matched by official hesitancy to further monetary tightening in Japan – with inflation falling everywhere.

And as US labor market signals continue to point to job creation, the relative rate picture appears to have shifted back in favor of the greenback – whose 1.5% appreciation this week is the biggest since April.

The Bank of England, a recent holdout in the rush to fix interest rates, was the latest to shift decisively, as BoE chief Andrew Bailey told the Guardian newspaper that the central bank could become “a bit more activist”. and “a little more aggressive.” “in its rate-cutting approach.

With a second rate cut of the year now fully priced for next month’s BoE meeting, sterling fell more than a cent on Thursday to a three-week low just above $1.31.

The tone has also changed on the European continent.

Isabel Schnabel, a member of the European Central Bank’s hawkish board, underlined forecasts for another ECB interest rate cut two weeks from now, saying on Wednesday: “A sustained decline in inflation back to our 2% target in due course is increasingly more likely”.

And her ECB colleague Mario Centeno went further: “We now face a new risk: undershooting the inflation target, which could stifle economic growth,” he said.

September’s European business surveys confirmed on Thursday that the bloc’s private sector activity slipped back into contraction last month.

A scenario of rapid disinflation was evident again in Switzerland, which saw monthly deflation of 0.3% last month, taking annual inflation to 0.8% – well below forecast and mounting pressure on the Swiss National Bank to relax again, even with the interest back, because already with 1%.

In his first public appearance since taking over, new president Martin Schlegel also said on Tuesday that the SNB does not rule out interest rates going into negative territory.

In Asia, the Bank of Japan’s moves to “normalize” its ultra-low policy rates also appeared to have been stalled, with the yen falling to a six-week low of 147 to the dollar.

Japanese Prime Minister Shigeru Ishiba on Wednesday completed a reversal from a perceived monetary hawk to a dove, saying: “I don’t think we are in an environment that would require us to raise interest rates further.”

BOJ policy maker Asahi Noguchi, who has ruled out a July interest rate hike, doubled down on Thursday, saying the central bank must be patient in normalizing policy.

The sudden concern around the world about falling inflation is partly due to falling oil prices – which, despite a modest drop in the Israel-Iran conflict this week, are still experiencing annual losses of more than 20% and have been for more than a month.

An OPEC+ meeting on Wednesday did little to offset this, with ministers keeping policy unchanged and including a plan to start raising output from December. And data over the past week showed that oil and gasoline stocks rose.

In contrast to Europe, Fed easing hopes have cooled somewhat as this week’s stream of employment statistics underscored the “soft landing” thesis there, taking more heat from low rate bets.

Private payrolls rose by 143,000 jobs last month after rising by an upwardly revised 103,000 in August, the ADP National Employment Report showed on Wednesday. September updates on layoffs and weekly jobless claims are due later Thursday, along with updated services sector surveys for last month.

Richmond Federal Reserve President Thomas Barkin told Reuters on Wednesday he was still concerned about the “last mile” in getting inflation back on target. “I’m more worried about inflation than the labor market,” he said of the outlook for next year.

The result was that futures prices for Fed rate cuts by the end of this year fell below 70 basis points and Treasury yields rose, with the 10-year retreating above 3.80%.

Stock markets around the world were more mixed, with European stocks in the red on Thursday and Hong Kong shares taking their first step back since China’s frenetic stimulus measures were unveiled last week.

outperformed with gains of nearly 2% on BOJ polls and a weakening yen.

With Wall St stocks on Wednesday held back by disappointing deliveries from automaker Tesla (NASDAQ: ), index futures were slightly in the red ahead of Thursday’s open.

Buoyed by hopes of a “soft landing,” high-yield U.S. junk bond yield spreads over Treasuries fell near their lowest level of the year and are testing historic lows on an options-adjusted basis.

With the third quarter earnings season about to unfold and looking at a final quarter of political nerves from the Middle East to the US election, the volatility gauge is above historical averages at just 20.

Key developments that should provide more direction for US markets later on Thursday:

* September US Challenger layoffs, weekly jobless claims, September service sector surveys from ISM and S&P Global, August factory goods orders

* Atlanta Federal Reserve President Raphael Bostic and Minneapolis Fed President Neel Kashkari both speak

* US Corporate Earnings: Constellation Brands (NYSE: ), Angiodynamics (NASDAQ:)

* US Treasury auctions 4-week bills

(By Mike Dolan; Editing by Mark Heinrich; [email protected])