The dollar notched an 11-month top on the yen on Thursday as stunningly strong US economic data drove Treasury yields to their highest since mid-2011, while Asian stocks were pressured as borrowing costs rose at home.
Higher US yields are anything but favourable for emerging markets as they tend to draw away much-needed foreign funds while pressuring local currencies.
Bond prices fell across Asia and long-term Japanese yields reached ground not visited since early 2016, a market tightening not warranted by domestic economic conditions.
“A simple dynamic is playing out in the global economy right now—the US is booming, while most of the rest of the world slows or even stagnates,” said HSBC economist Kevin Logan. “A Federal Reserve that is raising rates to prevent the US economy from overheating is constraining the policy options of countries where financial conditions are tightening and trade tensions intensifying.”
MSCI's broadest index of Asia-Pacific shares outside Japan skidded 1.1 per cent in response, with South Korea, the Philippines, Indonesia and Taiwan all down. Even the Nikkei eased 0.2 per cent, as rising yields offset the boost to exporters from a weaker yen.
The dollar had taken off after an influential survey of the US services sector showed activity at its strongest since August 1997, sparking speculation the payrolls report on Friday could also surprise. “The (ISM) index was significantly above the long-term average during periods of growth and consistent with the upside risks to growth,” said Kevin Cummins, senior US economist at NatWest Markets. “At a minimum, these data suggest that labour demand remains very strong.”
Federal Reserve Chairman Jerome Powell declared the economic outlook was “remarkably positive” and said rates might rise above “neutral”, currently anywhere from 2.5 to 3 per cent.
Dollar tracks yields
A Fed hike in December is now put at an 8 in 10 chance, while investors lifted expectations for how high rates may eventually go. Fed fund futures for December 2019 sank to a contract low of 97.12, implying a rate of 2.88 per cent. At the start of this year they had looked for only 2.1 per cent.
Yields on 10-year Treasury debt were at 3.18 per cent, having spiked 12 basis points overnight to the highest since June 2011. It was the steepest daily increase since the shock outcome of the US presidential election in November 2016. The jump in yields boosted financial shares on Wednesday, putting the S&P 500 within striking distance of a record.
Financials were also aided by signs Italy would cut its budget deficit and lower its debt, easing concerns that had pressured global stock markets. The Dow rose 0.2 per cent, while the S&P 500 gained 0.07 per cent and the Nasdaq 0.32 per cent.
The groundswell of economic optimism swept the US dollar to a six-week high on a basket of currencies and it was last trading up at 96.085. The gains were broad based with the euro falling back to $1.1471 after being as high as $1.1593 on Wednesday. The dollar shot to its highest so far this year on the yen at 114.55 before steadying at 114.35. It was now threatening a major peak from November 2017 at 114.735.
In Asia, the Indian rupee and Indonesian rupiah have been under heavy fire, in part because both countries are being squeezed by the soaring cost of imported oil.
Oil prices have reached four-year peaks as the market focused on upcoming US sanctions on Iran while shrugging off the year's largest weekly build in US crude stockpiles. Brent eased 18 cents to $86.11 a barrel on Thursday, while US crude fell 16 cents to $76.25.