US dollar dips as Lawrence Summers quits Federal Reserve race
Monday 16 September 2013
The US dollar slid while bonds and shares rallied on Monday after the withdrawal of Lawrence Summers from the race to head the Federal Reserve suggested a more gradual approach to tightening monetary policy.
Further whetting risk appetite were signs of progress in Syria following a Russian-brokered deal aimed at averting US military action, all of which helped propel world shares .MIWD00000PUS to just short of a five-year high.
European bourses were already there as gains of 0.8 percent on London's FTSE .FTSE and Paris's CAC 40 .FCHI and 1.1 percent on Frankfurt's Dax .GDAXI lifted the FTSEurofirst 300 .FTEU3 0.75 percent to follow up a strong day in Asia.
Summers' surprise decision came just before the U.S. central bank meets on Tuesday and Wednesday to decide when and by how much to scale back its asset purchases from the current pace of $85 billion a month.
Investors wagered that US monetary policy would stay easier for longer should the other leading candidate for Fed chair, Janet Yellen, get the job.
Markets had perceived Summers as less wedded to aggressive policies such as quantitative easing and more likely to scale stimulus back quickly than Yellen, who is currently second in command at the Fed.
“Clearly the dollar doesn't like the idea it could be Yellen at the helm because of the interpretation that QE could be in place for longer,” said Jane Foley, senior currency strategist at Rabobank.
“The weakness of data more recently, the retail sales on Friday for example, has also bought home that we are still a little way from the US having a resilient recovery ... so I think Summers's withdrawal has touched a bit of a raw nerve.”
It was even possible a first Fed rate rise could be pushed out into 2016, rather than 2015 as currently planned, added Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ. Going by Yellen's past speeches, he said she would most probably prioritize reducing unemployment.
“Yellen looks like the clear front-runner, and seems to be the public's popular choice,” he said. “The Fed will shoot to lower the unemployment rate to the full employment level, and this means the new target could be more 5.5 percent, not 6.5 percent.”
The dollar slipped to a near four-week low against a basket of currencies .DXY, with the euro up more than half a US cent at $1.3370 after hitting its highest in almost three weeks and sterling at an eight-month high.
The greenback proved more resilient against the yen, which was hampered by its status as a safe haven and pared early losses to stand at 98.80. Liquidity was lacking with Japanese markets closed for a holiday on Monday.
Stock futures for the S&P 500 and Dow Jones industrial average climbed over 1 percent to 1,698.30 and 15,376.06 respectively.
MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS gained 1.5 percent to its highest since early June. South Korean shares .KS11 added 1 percent, Australia .AXJO 0.5 percent and Indonesia 1.7 percent .JKSE.
Sentiment was underpinned by Saturday's deal between Russia and the United States to demand that Syrian President Bashar al-Assad account for his chemical arsenal within a week and let international inspectors eliminate all the weapons by the middle of next year.
In debt markets, futures for the US Treasury 10-year note leapt three-quarters of a point following Summers' withdrawal from the Fed race, a sizable move, as investors took yields - which move inversely to prices - lower.
Cash yields dropped to a month-low, going as far as 2.8031 percent before clawing back to 2.818 percent. German Bunds tracked the moves closely and were last at 1.883 percent, well down on last week's peak of 2 percent.
The more distant Eurodollar contracts rallied as the market pared back expectations for how quickly the Fed might finally start to tighten, as opposed to just tapering its stimulus.
Contracts from late 2014 out to 2016 all enjoyed double-digit gains suggesting a hike was now considered more likely in 2015, rather than in late 2014.
The prospect of a more protracted easing cycle would be a big relief to emerging markets from India to Brazil which have been hurt by expectations offshore funds would switch to developed markets as yields there rose.
Emerging market stocks .MSCIEF were up 1.3 percent by 0945 GMT and most emerging Asian currencies were on the front foot, with India's rupee leading the charge at a near one-month high.
In commodities markets, gold recouped some of last week's losses, with the precious metal rising to $1,327 an ounce from around $1,308 and growth-sensitive copper making ground as it lifted off a five-week low.
Oil prices declined as the likelihood of a US strike on Syria seemed to recede further.
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