The dollar retreated on Friday after two days of gains while world stocks pulled further back from all-time highs as investors unwound positions on growing expectations that the U.S. Federal Reserve will raise interest rates later this month. Fed officials have lined up to sing the need for higher rates soon, sending the implied probability of a move this month surging to 74 percent, from just 30 percent at the start of the week. Fed Chair Janet Yellen and Vice Chair Stanley Fischer are both due to speak later on Friday and are expected to stick to the same tune.
The dollar index which measures the greenback’s strength against a basket of six major currencies was poised for its fourth straight weekly gain, though it was about 0.1 percent lower on Friday.
“The U.S. dollar has been snapped up across the board as a March Fed hike is heavily priced in,” said Sean Callow, a senior currency strategist at Westpac. “All it took was about a hundred comments from Fed officials, but markets have finally decided that “fairly soon” means less than two weeks and that perhaps 3 hikes this year means 3 hikes this year.”
Expectations of a Fed rate hike soured the party on Wall Street, however, as financials led major U.S. indices lower. That weakness spilled over to Europe where the benchmark STOXX 600 fell for a second day dragged lower by industrials and consumer-related stocks. The total market value of global stock markets hit an all-time high of $56.7 trillion earlier this week, having added more than $4 trillion since Donald Trump’s election as U.S. president last November.
More than half of those gains were down to the rally in U.S. stocks, into which investors have pumped money for four of the past five weeks, according to the latest data from Bank of America Merrill Lynch and fund tracker EPFR. Stock futures on the S&P 500 were down 0.3 percent as investors reassessed the market’s lofty valuations in the face of rising borrowing costs. In Europe, economic data continued to point to a brightening recovery as activity in euro zone businesses grew at its quickest pace in nearly six years in February and job creation reached its fastest in almost a decade.
Rising euro zone inflation, along with easing anxieties over elections in France and growing talk of a March U.S. rate rise, put Germany’s benchmark 10-year government bond yield on track for its biggest weekly rise since November’s U.S. election. In commodities, oil prices rose as the dollar edged away from a multi-week high, though gains were held in check by unchanged Russian output for February, a sign of its weak compliance on a global deal to cut supplies. Benchmark Brent crude futures were up 0.4 percent at $55.29 a barrel after closing down 2.3 percent in the previous session. WTI futures gained 16 cents, or 0.3 percent, to $52.77.