The U.S. dollar extended its broad rally early Friday, hitting its highest level in a year, as the Federal Reserve chief's hawkish stance sent short-term Treasury yields soaring, leaving Wall Street in the lurch. red and most Asian markets in difficulty.
Fed Chairman Jerome Powell said there was no need to rush rate cuts with the economy still growing, the jobs market strong and inflation still above average. target of 2%, tempering expectations of a rate cut next month.
Fed funds futures for next year fell, with December dropping 7 points and implying just 71 basis points of rate cuts by the end of 2025. A rate cut the next month is no longer a highly likely event, with just 61% priced, down from 82.5% in the previous session.
This sent the dollar higher overall, particularly against the euro, as expectations of more aggressive easing in Europe further weakened the single currency which is already trading at its lowest level in a year.
On Friday, Nasdaq futures fell 0.4%, while S&P 500 futures fell 0.3%. EUROSTOXX 50 futures fell 0.5%.
MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.1% and 4.6% for the week, marking the biggest weekly loss in more than two years.
Tokyo's Nikkei index, however, gained 1.1% thanks to the decline in the yen, which improved the outlook for Japanese exporters. It still lost 1.3% over the week.
Even before Mr Powell spoke, producer price data showed the core index surprised slightly to the upside, which also had markets worried about the pace of further easing .
Goldman Sachs now sees a greater risk that the Fed will slow the pace of easing sooner, perhaps as soon as the December or January meetings, while JPMorgan still expects the Fed to cut rates in December, although it expects the central bank to reduce the pace of easing in January.
“After the sugar high of Trump's election and its impact on corporate earnings forecasts, market enthusiasm is dampened by greater uncertainty over interest rates, particularly for next year” , said Kyle Rodda, principal analyst at Capital.com.
Yields on short-term Treasury bonds climbed overnight and remained elevated Friday. Two-year yields held steady at 4.36%, after rising 6 basis points overnight to close at 4.357%.
In currency markets, the dollar reached its highest level in a year against its main counterparts. It gained five days against the yen, rising another 0.2% to 156.56, its highest level since July.
The euro suffered heavy losses at $1.0529 and is expected to lose 1.77% per week. Minutes from the European Central Bank's latest meeting showed that last month's cut was likely an insurance measure.
The markets are, however, more pessimistic towards the ECB and consider that there is a 36% chance that it will intensify its easing in December with a movement of half a point to protect itself against growth risks. They are also betting that the ECB will have to cut rates at every meeting until the middle of next year.
The soaring dollar has put pressure on commodity prices, with the price of gold falling 4.4% this week to $2,566.45, bringing the monthly loss to a considerable level of 8%.
Oil is also down for the week. Brent crude oil futures are on track to lose 2.1% for the week and stood at $72.33 per barrel.
