Dollar dumped, bonds buoyant on Fed inflation caution

SYDNEY - 23 November 2017: The dollar was on the defensive Thursday after suffering its worst drubbing in five months while bonds celebrated a comeback on speculation the Federal Reserve might not tighten U.S. policy as aggressively as previously thought.

Moves in Asian share markets were mostly minor with Japanese markets closed for a holiday and the United States off for Thanksgiving. Spreadbetters pointed to a slightly easier opening for the major European bourses.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS eked out a fresh 10-year peak with a rise of 0.15 percent, as did Hong Kong's main index .HSI.

The dollar’s rout came after minutes of the Fed’s last meeting showed “many participants” were concerned inflation would stay below the bank’s 2 percent target for longer than expected.

That echoed comments from Fed Chair Janet Yellen that she was uncertain about the outlook for inflation and led markets to pare back pricing for more hikes next year.

While a move in December to between 1.25 and 1.5 percent is still almost fully priced in, Fed fund futures <0#FF:> rallied to show rates at just 1.75 percent by the end of next year.

“The US dollar was already staggering into Thanksgiving when the FOMC minutes gave it another shove,” said Sean Callow, a senior currency analyst at Westpac. “The FOMC seems to be increasingly uneasy about ”ongoing softness“ in inflation.”

“Investors can be forgiven for wondering why they should buy more U.S. dollars if we are heading into a ”Powell pause“ in the first half of 2018,” he added, referring to newly appointed Fed Chair Jerome Powell.

BONDS RALLY BROADLY

Against a basket of currencies, the dollar was huddled at 93.184 .DXY, having shed 0.75 percent overnight.

The euro was enjoying the view at $1.1834 EUR= after climbing from $1.1731 on Wednesday. The dollar also crumbled to 111.27 yen JPY=, near its lowest since Sept. 20. The overnight move was the largest single-day fall against the yen since May.

The Fed’s dovish turn helped break the inexorable sell off in short-term U.S. Treasuries, with yields on the two-year note US2YT=TWEB falling almost five basis points to 1.727 percent. That was the sharpest daily drop since early September.

The rally spilled over into Asia, where Australian 10-year bond yields AU10YT=RR fell to their lowest since June and dealers expected European bonds to follow as well.

Wall Street had been an oasis of calm in comparison with the Dow .DJI off 0.27 percent, while the S&P 500 .SPX lost 0.08 percent and the Nasdaq .IXIC added 0.07 percent.

Verizon (VZ.N) and AT&T (T.N) rose 2.0 percent and 1.6 percent respectively on bets they will benefit from the U.S. government’s plan to rescind net neutrality rules put in place by the Obama administration.

Commodities were buoyed by the dive in the dollar, with gold up at $1,290.02 an ounce XAU= having added 0.9 percent overnight.

Oil prices paused after hitting their highest in more than two years after the shutdown of one of the largest crude pipelines from Canada cut supply to the United States. [O/R}

U.S. crude futures CLc1 eased back 12 cents to $57.90 a barrel, after jumping 2 percent on Wednesday to ground last trod in mid-2015. Brent crude LCOc1 dipped 18 cents to $63.14 a barrel.