Global Interest Rate Cuts Put Dollar in the Driver’s Seat by Reuters

A look at the day ahead in the European and global markets from Stella Qiu

A series of interest rate cuts over the past few days, with huge 50 basis point moves in Switzerland and Canada and a 25 basis point ECB easing, helped stimulate the US dollar, which jumped 1% against the euro, and 1.6%, respectively. The Swiss franc and 1.8% on the Japanese yen.

The dollar also drew energy from rising Treasury yields as investors reduced their expectations for a strong US policy easing next year. Markets remain confident the Fed will cut interest rates next week, but they abandoned a move in January, which was priced in at only a 20% chance.

US President-elect Donald Trump will almost certainly be back in the Oval Office by the time of the next Fed meeting, and he may have pushed through dozens of executive orders with wide-ranging trade and political implications.

The continued strength of the dollar is putting pressure on currencies in emerging markets, which limits their room for policy accommodation. The Indonesian rupiah hit a four-month low on Friday and its central bank was forced to intervene repeatedly to support the currency.

It is likely that India’s central bank has been selling dollars through state banks to support the rupee, which is near record lows.

The yen was also the biggest loser, weighed down by expectations that the Bank of Japan is unlikely to raise interest rates next week. Wage problems in small businesses are another reason why the Bank of Japan may proceed cautiously with any tightening of monetary policy.

An additional factor worth noting regarding US yields and the dollar is that the US Producer Price Index data released on Thursday was biased higher by egg prices and the core rate was behaving much better, such that analysts revised expectations for the crucial core PCE index to around 0.13. % of 0.2%-plus.

Long-term Treasuries suffered heavy losses this week, with the yield on the benchmark 10-year bond rising by 17 basis points while 30-year bond yields rose by 22 basis points, the largest weekly rise in more than a year.

Disappointing results from Thursday’s 30-year bond auction were also partly to blame, but the rise in yields largely reflects an upward repricing of final interest rates. Interest rates in the United States are expected to fall slowly to 3.8% by the end of 2025, compared to 1.75% in Europe and 2.7% in Canada.

In Asia, most stocks fell, with China leading the losses.

Hopes were high for China’s Central Economic Work Conference in Beijing after the Politburo meeting changed the monetary policy stance to “moderate easing,” the first such change in 14 years, but nothing specific emerged.

Europe is set for a lower open ahead of the release of some secondary economic data, including monthly GDP in the UK and industrial production in the Eurozone. EUROSTOXX 50 futures fell 0.3%, while Nasdaq futures rose 0.3%, near a record high.

Several ECB officials will speak later in the day. The central bank, which disappointed doves who had hoped for a 50 basis point move on Thursday, is expected to cut rates by a quarter of a percentage point at each policy meeting until the middle of next year.

Key developments that may impact markets on Friday:

– Monthly GDP data for the United Kingdom

– Industrial output of the euro area