US Dollar Gains; Equities Lose

The US Dollar, which retreated to three-year lows last month, has taken a boost from the Fed chair’s comments and expectations as expressed in his testimony last Tuesday. The dollar index against a basket of six major currencies rose to the highest level since January 19^th at 90.744.

The index has managed to drop down to a three-year trough of 88.253 set in mid-February when fears of a ballooning U.S. budget deficit and lingering worries that Washington could pursue a weak dollar policy took a toll.

As per comments from a senior strategist at SMBC Nikko Securities in Tokyo, the rebound of the US dollar could have a negative impact on the crude oil prices and in turn cool down inflation expectations. In that case, the equity markets could be forced to undergo significant adjustments.

A stronger US Dollar tends to weigh on dollar-denominated commodities including crude as it makes them more expensive for non-U.S. buyers of dollarized goods.

Also important to note is the pressure the Euro has experienced on Wednesday after data showed euro zone inflation is slowing to a 14-month low which underscores the European Central Bank’s caution over removing its monetary stimulus. Meanwhile, uncertainty also looms over the common currency ahead of the Italian election on March 4^th.

Investors have been on edge in recent weeks amid concerns of rising interest rates in advanced economies, led by the United States. Concerns over the future monetary policies in the US reflected to the worst month for equities in two years.

Powell’s first public appearance as head of the Fed on Tuesday, was marked by comments on preventing the economy from overheating while sticking with a plan to gradually increase the interest rates.

Hawkish comments spur speculation in equity markets over U.S. monetary tightening could be more aggressive this year and at faster than expected pace. In the equity markets the concerns that higher borrowing costs could decline corporate activity and as a result, cool economic growth.

Across the board, the Asia-Pacific shares outside Japan were down 0.5% and headed for the third day of losses.

The Dow Jones and S&P 500 experienced their worst month since January 2016. The Fed’s last round of economic projections in December pointed to three rate increases this year, but Powell’s remarks prompted investors to expect a fourth rate hike within 2018.

Fed Chairman Jerome Powell testifies today, Thursday March 1^st, before the Senate Banking Committee and investors remain on edge awaiting any new clues over the future of the Fed’s policy.

Markets anticipate the U.S. Jobs report – Nonfarm Payroll – on March 9^th to further price in expectations of accelerated Fed tightening policies. Inflation data on March 12 could point to growth in wages and a rise in prices would make the next FOMC meeting even more significant for traders and investors.