Dollar Rally Weighs on Oil to Gold as U.S. Stocks Extend Decline

What's the Big Question Markets Are Facing?
  • Fed officials touting a possible April hike boost greenback
  • Energy shares drive U.S. losses as crude sinks below $40

The dollar extended its longest winning streak in a month, while U.S. stocks declined a second day as prices for crude oil, gold and emerging-market assets retreated amid mounting speculation that the Federal Reserve is moving closer to raising interest rates.

The U.S. currency extended gains into a fourth day as officials signaled the Fed stands ready to raise rates at any meeting should economic data warrant tighter monetary policy. Energy producers led the Standard & Poor’s 500 Index to its biggest drop in two weeks and drove the Russell 2000 Index down by 2 percent. The greenback’s appreciation weighed on raw materials. with the Bloomberg Commodity Index posting its worst day in two months. Emerging-market stocks snapped a five-day rally and gold sank more than 2 percent.

After halving its projection for rate rises this year to two - a shift that spurred global stock gains and weighed on the dollar - the Fed is back in the spotlight as its own officials start to tweak that rhetoric. St. Louis Fed President James Bullard joined a growing chorus of U.S. policy makers emphasizing evidence of an improving economy may mean rates have to be hiked sooner rather than later. San Francisco Fed President John Williams and Atlanta Fed President Dennis Lockhart made similar comments earlier this week, saying borrowing costs may need to be increased as soon as the April meeting.

“Nobody’s really looking to make a substantial bet at this point,” said Brad McMillan, chief investment officer of Commonwealth Financial Network in Waltham, Massachusetts, which oversees $100 billion. “The big story over the past couple months has been an absolute loss of confidence and then all of a sudden the return of that confidence. The market’s continuing to struggle with the implications of the Fed.”

Traders put the chances of a hike in April at 8 percent, according to futures data compiled by Bloomberg. The odds of a single 25-basis-point move by December were at 72 percent, climbing from 68 percent a week ago.

Currencies

The U.S. currency gained for a fourth day versus the euro, sending the Bloomberg Dollar Spot Index, which tracks the greenback against 10 major peers, up by 0.7 percent as of 4 p.m. in New York. The greenback strengthened versus all 16 major peers, rising 0.3 percent to $1.1183 per euro. It was up less than 0.1 percent to 112.42 yen.

Strong data on employment, for example, could make the case for a move in April, Bullard said in an interview with Bloomberg Wednesday. March nonfarm payrolls data is due April 1.

“We’re seeing a little bit of a chorus forming this week with the Fed speakers, and they seem to be suggesting a more hawkish outlook for rates than the market is currently pricing in,” said Omer Esiner, chief market analyst at currency brokerage Commonwealth Foreign Exchange Inc. in Washington. “That’s what’s helping the dollar.”

Commodity-linked currencies saw the steepest declines as oil dragged other materials prices lower. Australia’s dollar slid more than 1 percent with Canada’s.

The pound weakened 0.6 percent to $1.4117, after sliding 1.1 percent on Tuesday amid speculation the terror attacks in Brussels will bolster the case of campaigners who want to see Britain leave the European Union.

Stocks

The S&P 500 retreated 0.6 percent to 2,036.71, while the Russell 2000 sank the most since March 8. Trading of U.S. shares was about 20 percent below the 30-day average, after the first two days of the holiday-shortened week delivered the two slowest days of volume across all U.S. platforms this year.

Equities may be losing momentum after a five-week rally erased the worst start to a year ever. The S&P 500 had barely budged in the two prior sessions, and has gone eight days without a move of more than 1 percent.

Energy shares sank 2.1 percent as oil futures slid below $40 a barrel in New York. Small-cap energy shares in the Russell 2000 Index plunged more than 5 percent, while an S&P index of homebuilders slumped 1.6 percent after data showed sales of new homes fell short of what economists projected. Nike Inc. dropped 3.8 percent after its annual forecast missed analysts’ estimates.

The Stoxx Europe 600 Index fell 0.1 percent, after earlier climbing as much as 0.6 percent. While the bombings in Brussels initially hit European equities and fueled demand for haven assets on Tuesday, the impact on financial markets proved temporary. Terrorist incidents including the one in Paris in November and the London bombings in 2005 spurred equity selloffs that were erased in the following days and weeks.

The MSCI Asia Pacific Index lost 0.9 percent as Japanese shares swung to losses and mining stocks in the region fell.

Commodities

West Texas Intermediate crude dropped 4 percent to $39.79 a barrel after a U.S. government report showed rising crude stockpiles kept supplies at the highest level in more than eight decades.

Crude inventories rose 9.36 million barrels last week, according to the Energy Information Administration, more than three times the increase projected by energy analysts. Stockpiles at Cushing, Oklahoma, the biggest U.S. oil-storage hub, dropped 1.26 million barrels from a record high.

Gold futures fell to the lowest level in almost a month as the dollar extended its gains, reducing demand for the metal as an alternative asset. Bullion for April delivery slid 2.2 percent to $1,221.10 an ounce in New York, after touching $1,215.40, the least since Feb. 22.

Industrial metals also declined, with zinc down 1.9 percent to $1,836 a metric ton. Aluminum fell 1.4 percent and copper sank 2.3 percent.

Sugar traded near its highest closing price in more than a year. Dry weather in areas where the crop is grown, such as Thailand, has led market forecasters to reduce their production estimates, sending futures soaring about 30 percent in the past month.

Bonds

Yields on U.S. Treasuries due in a decade fell six basis points, or 0.06 percentage point, to 1.88 percent, after climbing to the highest level in a week. 

Benchmark German bund yields rose two basis points to 0.19 percent, after falling two basis points on Tuesday. The nation sold 810 million euros of 30-year securities in an auction that failed to draw enough bids to meet its target.

Rates on Japanese government notes due in 10 years slipped two basis points to negative 0.114 percent.

Emerging Markets

MSCI’s Emerging Markets Index fell 1.1 percent, after rising 5 percent over the previous five days. A Bloomberg gauge of 20 emerging-market currencies also retreated, slipping 0.7 percent, paring its gain this month to 4.3 percent.

Stock indexes in Brazil and Argentina were among the biggest decliners, as the drop in oil also weighed on Russian equities.

Chinese stocks rose in late trading amid a revival in margin lending. The Shanghai Composite Index added 0.4 percent, with gains coming in the last 30 minutes of trading as technology companies rallied. Outstanding margin trades rose by 2.2 percent, the most since Nov. 9, to 863.3 billion yuan ($133 billion) on Monday, data compiled by Bloomberg show.

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