Morning auction: decline of the dollar | Reuters

US one dollar banknotes are seen in front of the stock market graph displayed in this illustration taken February 8, 2021. REUTERS/Dado Ruvic/Illustration

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A preview of the day ahead in US and global markets by Mike Dolan.

All of a sudden, the US dollar is on its back.

After a month of relentless gains to its highest levels in decades, the DXY dollar index fell more than 1% on Friday and was on course for its biggest daily loss since early August.

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Perhaps this is just scum, as speculators book profits on already extreme moves.

But there are other important roadblocks.

Japan is threatening to take action – possibly open market buying – to halt the yen’s steep slide, with Bank of Japan chief Haruhiko Kuroda the latest to intervene. read more

And European central banks are matching the Federal Reserve’s hawkish anti-inflation stance with their own 0.75 basis point interest rate hikes, with ECB chief Christine Lagarde explicitly citing dollar strength as an aggravating factor. . The Bank of England is likely to do the same next week, especially with some concern over the pound sinking to a 37-year low during the week.

European two-year bond yields rose as the US two-year yield premium over its G7 partners declined.

However, just as everyone goes into a hawkish frenzy, there are hopes for a turn in the inflation picture. And stock markets around the world rallied at the end of the week.

Energy price interventions, price caps, subsidies and demand chillers are underway in Europe, Britain’s energy bailout is expected to cut the rate by up to 5 percentage points maximum inflation there.

Meeting separately ahead of a meeting of European Union finance ministers in Prague, French and German finance ministers backed the ECB’s decision and pledged to work together to support households and businesses through the shock period energy and high inflation. Read more

EU energy ministers will meet in Brussels to discuss oil and gas price caps and other specific measures. Read more

Although crude oil prices attempted to regain a foothold above $90 a barrel on Friday, they remain down 28% from mid-June highs. Read more

And another indication of easing price pressure was that China’s inflation rate slowed more than expected last month as its economy struggles with COVID lockdowns. Read more

With financial markets now expecting another monthly drop in the US August consumer price index next week, the combination of central bank action, oil price relief energy and fears of recession registers.

At just 2.3%, two-year U.S. inflation expectations embedded in the Treasury market are at their lowest level in 18 months, while five-year inflation “breakevens” are slipping back towards 2.5% for the first time since mid-July.

And despite all the harsh rhetoric, Fed policymakers remain hopeful of a “soft landing.”

“We think we can avoid the kind of very high social costs that Paul Volcker and the Fed had to put into play” in the 1980s, Fed Chairman Jerome Powell said Thursday. Read more

Any shred of optimism is welcome. Bank of America’s weekly mutual fund flow tally showed U.S. equity funds suffered their biggest weekly outflow in nearly three months, with tech stocks suffering their biggest outflow since 2019.

Key developments that should provide more direction to US markets later on Wednesday:

* European Union energy ministers meet in Brussels; Eurozone finance ministers meet in Prague

* Christopher Waller, member of the board of directors of the Fed; Kansas City Fed Chief Esther George; Chicago Fed Chief Charles Evans Talks All

* Fed releases quarterly U.S. financial accounts

G7 2-Year Yield Spreads Versus US
Fund flows: global equities, bonds and money market

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By Mike Dolan, editing by Kim Coghill; [email protected]. Twitter: @ReutersMikeD

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The opinions expressed are those of the author. They do not reflect the views of Reuters News, which is committed to integrity, independence and non-partisanship by principles of trust.

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