The US Dollar Suddenly Rises In Stock Market With the Shift Of the Fed’s Position

The Asian stock market has fallen to a three-week low on 17th June 2021, after the Fed hinted that it might raise interest rates much faster than expected, shocking investors and pushing bond yields and the U.S. dollar higher. The U.S. dollar posted its biggest one-day gain in 15 months, as the yield on 10-year U.S. Treasury bonds hit the biggest increase since early March.

The stock market’s decline was milder, but it was enough to push the MSCI Asia Pacific (except Japan) index down by about 0.6% to its lowest level since the end of May. Japan’s Nikkei Index fell 1%, and S&P 500 index futures fell 0.4% during the Asian session.

The performance of emerging markets may not be so good because they are vulnerable to the early US interest rate hike to push funds to withdraw from risky assets, but Asian markets have moderate selling pressure, and emerging currencies have stabilized.

The Fed’s forecast, that is, the dot plot, shows that 13 of the 18 participating committee members expect to raise interest rates in 2023, compared with only six before. At this meeting, seven people believe that interest rates will be raised for the first time in 2022. Although the dot plot is not a promise, and the past record in predicting the direction of interest rates is also very poor, this sudden change is still shocking.

The Fed hinted that it will now consider whether to gradually reduce its asset purchases at each meeting. The Fed also lowered its assessment regarding risk of the epidemic in view of the progress of vaccination. This is equivalent to sprinkling a handful of salt on the wound. JPMorgan Chase analysts pointed out that Chairman Powell was not so aggressive at the press conference.

The market quickly digested the risk of the Fed raising interest rates early. The Fed’s funds rate futures shifted to hint at the first interest rate hike before the end of 2022. The U.S. 10-year Treasury bond yield soared by nearly nine basis points to 1.57%.

The U.S. dollar rose sharply, breaking away from the recent narrow range, rising 0.9% against a basket of currencies overnight to 91.387, the largest increase since March last year. The euro stayed at a five-week low of $1.1990, falling 1.1% overnight, the biggest drop since March 2020. USD/JPY also soared to 110.69, which looks set to test the 2021 high of 110.96.

The rise in bond yields and the U.S. dollar was a double blow to the interest-free asset gold. Spot gold fell to $1,821 per ounce after falling 2.5% overnight. Oil prices were boosted by improved global demand prospects and still tight supply. Brent crude oil futures hit their highest point since April 2019 and then suffered profit-taking. Brent crude oil recently fell 1% to US$73.57 per barrel, while US crude oil also fell 1% to US$71.41.