Thursday, October 28, 2010

Dollar up; stocks, commodities down, eyes on Fed

NEW YORK: The dollar rose while stocks and commodities fell on Wednesday, Oct 27 on doubts over how aggressively the Federal Reserve is going to attempt to stimulate the flagging U.S. economy.

Investors had been pricing in large-scale bond purchases by the Fed. That view lifted equities, commodities and emerging market assets in recent weeks while the dollar fell because more Fed injection of funds into the economy via quantitative easing would lower the currency's value, at least in the short term.

"The dollar's slide since September has been pricing in aggressive price action by the Fed to around $1 trillion," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange.

But market participants have begun to scale back expectations of the Fed's intentions. The Wall Street Journal said on Wednesday that the Fed is likely to unveil an asset-purchase program worth a few hundred billion dollars over several months. It said officials want to avoid a "shock and awe" approach in their announcement, expected next week.

"Some stabilization, Fed official comments and the Wall Street Journal article have resulted in investors' paring back those aggressive expectations. Given the price action, we can assume they are trimming those short dollar bets," Esiner said.

A Reuters survey on Oct. 8 showed U.S. primary dealers expected the size of the quantitative easing to be between $500 billion and $1.5 trillion.

The dollar was up against major currencies, with the U.S. Dollar Index up 0.48 percent at 78.084.

The euro was down 0.64 percent at $1.377. Against the Japanese yen, the dollar was up 0.38 percent at 81.71.


The uncertainty over the size and pace of quantitative easing dampened some equities and commodity prices.

The Dow Jones industrial average ended down 43.18 points, or 0.39 percent, at 11,126.28. The Standard & Poor's 500 Index was down 3.19 points, or 0.27 percent, at 1,182.45. The Nasdaq Composite Index gained 5.97 points, or 0.24 percent, to 2,503.26.

"People care more about quantitative easing than anything else today," said Michael O'Rourke, chief market strategist at BTIG LLC in New York.

"The Fed lowering what it could do should put some pressure on the risk assets that have been trading with QE as a catalyst."

World stocks measured by the MSCI All-Country World Index fell 0.91 percent and MSCI emerging market benchmark lost 1.63 percent.

U.S.-listed shares of Argentine stocks surged following news that the president's husband and predecessor, Nestor Kirchner, had died. Transportadora de Gas Del Sur S.A. soared 11 percent to $4.41 while IRSA Investments and Representations Inc added 7.4 percent to $14.95.

The December futures contract for the Nikkei 225 stock index trading in Chicago fell 30 points to 9,425.

Europe's FTSEurofirst 300 closed down 0.7 percent after data showing weakness in a category of U.S. durable goods orders and on uncertainty over the outcome of the Fed's Nov. 2-3 meeting.

U.S. Treasuries widened losses on news that sales of new U.S. single-family homes rose more than expected in September, while prices rose and the supply of homes on the market was the lowest in 42 years.

Also, the government's sale of $35 billion in five-year notes fetched lukewarm demand, pressuring government bond prices.

The benchmark 10-year U.S. Treasury note was down 21/32, with the yield at 2.7216 percent. The 2-year U.S. Treasury note lost 2/32, its yield at 0.4143 percent. The 30-year U.S. Treasury bond dropped 29/32, with the yield at 4.0555 percent.

Gold prices fell $14.10, or 1.05 percent, to $1325.30 an ounce as the dollar rose. Gold typically falls when the dollar strengthens, and vice versa, as a firmer U.S. currency curbs the metal's appeal as an alternative asset. Like all dollar-priced commodities, it also becomes more expensive for other currency holders.

Crude oil fell 58 cents, or 0.7 percent, to $81.97 per barrel. - Reuters

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