The dollar and US Treasury yields fell, while Asian equities rallied yesterday after the Federal Reserve indicated it could soon cut interest rates, adding to optimism of a breakthrough in the China-US trade row.
Oil prices extended already strong gains after Iranian claims it had shot down a US drone in its airspace added to geopolitical tensions.
The softer slant from the US central bank provided more support to global investors, who were already in buoyant mood after Donald Trump flagged positive talks with China’s Xi Jinping and said they would meet next week.
After a much-anticipated meeting, Fed boss Jerome Powell said officials felt the case for a reduction had “strengthened”, citing the trade standoff with China and weak inflation, adding it would “act as appropriate” to support growth.
The bank also dropped the word “patient” in describing its assessment of economic data, fuelling speculation of a reduction as soon as July.
“The forward guidance from the Fed was no longer about being patient but being pragmatic,” said Kerry Craig, global market strategist at JP Morgan Asset Management. “As inflation is taking longer to return to target and trade uncertainty is weighing on the global outlook, the Fed is singing a dovish tune.”
He added that Powell “walked a fine line, highlighting a level of confidence in the US economy, even as growth is expected to slow and vulnerabilities from global politics increase”, which was enough not to cause concern to traders.
Analysts at NAB bank said “the change in the Fed’s bias has encouraged the market to increase its expectations that a new round of easing is just around the corner”.
The news hit the dollar, which fell across the board on foreign exchanges with higher-yielding units boosted by a pick-up in risk sentiment.
The South African rand was 1.8% higher, South Korea’s won gained 1.2% and Canada’s dollar rose 1.1%.
There were also big gains for China’s yuan, the Australian dollar, the Thai baht and Mexican peso. The dollar was even down against the euro, which has come under pressure since the European Central Bank hinted Tuesday at its own rate cuts, and the Brexit-battered pound.
Iran fans oil rally
The prospect of lower borrowing costs lifted equity markets on Wall Street, while the yield on US Treasuries fell below 2% for the first time since 2016 – having been above 3% in November.
Tokyo ended 0.6% higher at 21,462.86 as traders shrugged off a stronger yen, Hong Kong rose 1.3% to 28,550.43 and Shanghai finished 2.4% higher at 2,987.12, with Sydney up 0.6%.
Singapore added 0.8%, while Taipei and Manila each gained 0.1%, though Wellington and Jakarta were slightly lower.
Focus now turns to the meeting between Trump and Xi on the sidelines of the G20 summit in Osaka next week, with optimism at its highest since last month after the US president’s tweet about “a very good telephone conversation” with his Chinese counterpart.
On oil markets both main contracts were up more than 2% after Tehran said it had shot down a US “spy drone”.
Crude had already been well up after official data showed a drop in US inventories – indicating a pick-up in demand – and news Opec and other producers led by Russia had agreed a date to discuss further caps.
The dollar’s sharp drop also provided healthy support, making the commodity more attractive to investors using other currencies.
Iran’s Revolutionary Guard said it had downed the US aircraft after it violated Iranian airspace near the Strait of Hormuz, in the latest incident to stoke tension in the strategic sea lane. The development comes after Tehran was blamed for attacks on two tankers in the strategically crucial Gulf of Oman.
There was no immediate reaction from the United States but the move adds to concerns of a flare-up between the old foes in the region.
“This will only stoke tensions in the region and produce short-term support for oil prices,” said Neil Wilson, chief market analyst at Markets.com. “We await to see whether this escalates further – the response from the White House will be important.”
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