LDN - Business

Non-committal Fed drives down dollar, dampens stocks

[February 02, 2017] By Marc Jones

LONDON (Reuters) - The dollar slipped to a 12-week low on Thursday and stock and bonds markets both showed caution after the U.S. Federal Reserve stuck to its mildly upbeat view of the world but gave no hint on when it will next raise interest rates.

With all the political uncertainties about, the big central banks appear to be lying low – or at least trying not to add to the volatility.

The Fed decision and statement was a non-event, with the lack of any nod toward a possible further rate rise next month – not least because the latest U.S. economic numbers have been so strong.

It sent the dollar to its lowest level since mid-November against a six-strong group of other top world currencies, to add to January's worst start to a year in three decades.

Rabobank analyst Michael Every said despite tweaks in the Fed's statement, including that inflation "will", rather than "is expected to" rise to 2 percent, it could be taken as broadly dovish.

"There was not the spoon-feeding ‘expect a rate hike in March’ guidance the market has come to expect (from the Fed) before such changes in policy are made," he said.

There was another salvo of Twitter comment from U.S. President Donald Trump, this time aimed at Iran and a "dumb" immigration deal struck with Australia.

The Aussie dollar didn't mind though, concentrating instead on strong trade surplus figures as it jumped 1 percent to a near three-month high.

Rattled euro zone bond market drew some comfort from the Fed's apparent lack of urgency to push up rates. Yields, which move inverse to price, drifted down across the board with those on benchmark Bunds down to 0.48 percent.

France's bonds went with the flow but the gap over German peers was near its widest level in three years on nerves about far-right Marine Le Pen polling strongly ahead of elections in April and May.

Back in the currency market, sterling also pounced on the weakened dollar to hit a 12-week high as construction sector data showed builders, like manufacturers the day before, are seeing a sharp rise in their costs.

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U.S. Federal Reserve Board chair Janet Yellen testifies before a Congressional Joint Economic hearing on Capitol Hill in Washington, DC, U.S. November 17, 2016. REUTERS/Gary Cameron

BANK OF BREXIT

It set the stage nicely for the Bank of England's first meeting and economic forecasts of the year.

With Brexit looming it may take a leaf out of the Fed's book and choose to play a straight bat, although it may implicitly send a less dovish signal than normal as it’s likely to be forced to upgrade growth and inflation forecasts.

Euro/dollar – supercharged this week by the Trump team’s warnings on overseas currency manipulation – was back above $1.08 while dollar/yen was back below $113.

European stocks were left flat-footed though as disappointing company results, including a $7.5 billion fine for wrongdoing for Deutsche Bank sent its shares down over 5 percent.

That was also despite Asian shares ex-Japan hitting their highest since mid-October as Korea's markets climbed to their best level since July 2015.

In commodities, oil began to edge higher again after news of a sharp rise in U.S. crude and gasoline stockpiles triggered a pause overnight.

Brent crude futures nudged up 8 cents to $57.02 a barrel threatening its highest level of the year, while key industrial metals like copper and nickel, but also safe-haven gold, moved higher too.

"We've been expecting the Fed's next rate hike to come in June and there was nothing indicating a hike in March," said Shuji Shirota, head of macro strategy group in Tokyo at HSBC.

(Reporting by Marc Jones)

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