End of easy money?
Surging euro, bond yields say yes
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[June 29, 2017]
By Jemima Kelly
LONDON (Reuters) - The euro surged to its
highest in over a year on Thursday, while sterling, bond yields and
global shares also climbed, as a slew of hawkish comments from central
banks signaled the era of easy money might be coming to an end not only
in the United States.
The dollar touched its lowest since October - before Donald Trump was
elected U.S. president - against its broad index, as investors shifted
to the view that the U.S. Federal Reserve might not be the only game in
town when it comes to higher interest rates.
With the Fed's clearing of all banks in the second part of its stress
tests, financials led global stocks to record highs. Worries over the
impact of tighter monetary conditions on share prices were offset by
confidence in robust global growth as central banks move toward
Wall Street was to open higher again after the S&P 500 scored its
biggest one-day percentage gain in two months in the previous session.
As euro zone bond yields rallied, the euro surged to as high as $1.1435,
its strongest since May 2016.
"If all central banks sound hawkish at the same time then divergence,
and therefore FX volatility, will stay low," Deutsche Bank currency
strategist George Saravelos wrote in a note to clients.
"The problem with this convergence, however, is that the Fed is already
in tightening flight mid-air with other central banks just about to take
off the runway. With the next big question for the market the timing of
a Fed 'landing', hawkish co-ordination in such an environment can do
serious damage to the dollar," he added.
In Britain, Bank of England Governor Mark Carney surprised many this
week by conceding a hike was likely to be needed as the economy came
closer to running at full capacity. Chief economist Andy Haldane took a
similar line on Thursday, saying the BoE needed to "look seriously" at
That sent sterling surging above $1.30 for the first time in five weeks,
leaving it close to its highest levels in nine months.
The Bank of Canada went further, with two top policymakers this week
suggesting they might tighten as early as July.
And that followed comments earlier in the week from European Central
Bank President Mario Draghi, who said stimulus might need to be toned
down so it does not become more accommodative as the economy recovers.
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A U.S. Dollar note is seen in this June 22, 2017 illustration photo.
ECB sources had tried to hose down talk of tightening, telling Reuters
on Wednesday that markets had over interpreted Draghi's comments. But
those comments could not prevent Germany's 10-year government bond yield
hitting a five-week high while other bond yields also climbed higher.
"This is simply the central banks getting together and trying to arrest
deflation," said Nomura's head of G10 currency trading Peter Gorra.
U.S. 10-year Treasuries were also up 16 basis points so far this week at
European shares failed to hold onto early gains, slipping a little as
utilities and construction stocks, which tend to suffer from the
prospect of higher interest rates, edged lower.
Shares in Europe's banks, however, rose for a fourth straight day, up
1.4 percent by 1200 GMT.
Earlier, Japan's Nikkei added 0.45 while MSCI's broadest index of
Asia-Pacific shares outside Japan rose 0.8 percent to its highest since
The dollar's fall boosted emerging stocks.
"Central banks will be very cautious in their approach," said Martin Whetton, a
senior rates strategist at ANZ.
"But once they start tightening in concert, and their bloated balance sheets
start unwinding, it is fair to say that bonds, equities, house prices and other
asset markets will face stiffer headwinds than they have for a long time."
The euro also surged to a 16-month top on the yen, as investors doubted the Bank
of Japan would be in any position to begin winding back its stimulus for a long
time to come.
Crude oil rose for a sixth straight session on a decline in U.S. output, hitting
a two-week high after a decline in weekly U.S. production eased concerns about
(Additional reporting by Wayne Cole in Sydney, Patrick Graham, Dhara Ranasinghe
and Sujata Rao in London, and Danilo Masoni in Milan; Editing by Jon Boyle and
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