The dollar weakened against other currencies while Asian stocks and US futures rose on Tuesday as investors dipped back into buoyant equity markets after some profit-taking in the previous session.
Contracts tracking Wall Street’s benchmark S&P 500 gained 0.7 per cent, while those tracking the tech-heavy Nasdaq 100 rose 1.2 per cent. US equity markets fell on Monday after surging late last week.
Asian markets, meanwhile, made strong gains after Xi Jinping and Joe Biden signalled a desire to improve US-China ties at a meeting on Monday ahead of the G20 summit in Indonesia, and Beijing moved to ease some pandemic curbs.
The dollar index, which tracks the currency against six others, fell 0.7 per cent, continuing a decline since its September peak.
The dollar is unlikely to slip too far if the US Federal Reserve keeps interest rates “higher for longer” in its battle against inflation, said forex analysts at Rabobank, though “an apparent reduction in geopolitical tensions” had undermined the currency’s strength.
In government bond markets, the yield on two-year US Treasuries slipped 0.06 percentage points to 4.34 per cent. The yield on the benchmark 10-year US note also fell 0.06 percentage points to 3.8 per cent. Yields fall when prices rise.
The shift in sentiment comes after the US consumer prices index last week came in below economists’ forecasts, boosting US equity markets — the S&P 500 gained 5.5 per cent on Thursday — and dragging down the dollar. October’s inflation data eases pressure on the Fed to raise interest rates by 0.75 percentage points for the fifth consecutive time when it meets in December.
Some analysts believe investors have become unjustifiably optimistic, however.
“S&P 500 daily returns of more than 2 per cent tend to be more frequent during bear markets,” said analysts at Goldman Sachs, who believed the recent rally in bonds and risky assets was “likely overdone”.
“The larger than expected inflation reset might support a slowdown in the hiking pace, but risks of a hike cycle extension remain,” the bank added.
Lael Brainard, vice-chair of the Fed, said on Monday that a slower pace of interest rate rises did not mean the central bank was damping its efforts to tackle historically high inflation.
“We’ve done a lot, but we have additional work to do both on raising rates and sustaining restraint to bring inflation down to 2 per cent over time,” she said, adding that while October’s better than expected inflation data was “reassuring”, it was only “preliminary”.
The debate over whether the latest upswing for equities constitutes the start of a genuine bull run or just a bear market rally is largely redundant in the absence of fresh economic news, argued Mike Zigmont, head of trading and research at Harvest Volatility Management.
“Let’s just accept that investors are confused, but they are also not scared,” Zigmont said. “They just got a huge dose of relief [from the latest CPI data] and now they’re acclimatising to the new environment.”
Bank of America’s latest Global Fund Manager Survey meanwhile revealed 92 per cent of those polled predicted a bout of stagflation — low growth and high inflation — in 2023.
In Asia, Hong Kong’s Hang Seng index added 4.1 per cent and has climbed by a quarter since its late-October low. China’s CSI 300 gained 1.9 per cent, while Japan’s Topix rose 0.4 per cent and South Korea’s Kospi added 0.2 per cent.
The regional Stoxx Europe 600 added 0.1 per cent in early trading and London’s FTSE ticked up by the same margin.