Dollar Retreats from Peaks, Wall Street Futures Slip

Image Credit: Reuters

Asian stock markets struggled to gain momentum on Wednesday, as Wall Street futures dropped due to disappointing earnings, and the dollar retreated against the yen following a dip in Treasury yields.

Investor sentiment was further dampened by President Donald Trump's unexpected comments suggesting the U.S. might take control of the Gaza Strip and develop its economy. This unexpected statement raised concerns about potential policy uncertainty and increased market volatility.

The mood slightly improved when China set a firm yuan fix, alleviating fears that it might let the currency slide to offset the impact of tariffs on exports. So far, China's response to Trump's additional tariffs has been relatively moderate, with levies on only $14 billion worth of U.S. exports. 

Julian Evans-Pritchard, Head of China Economics at Capital Economics, commented that China's measures were calculated to send a message to the U.S. without causing too much damage. However, there is a risk that China's retaliation could be insufficient to pressure the U.S. to reverse tariffs but might still escalate tensions.

A survey showed China's services activity expanded at a slower pace in January, but analysts believed this was largely due to the timing of the Lunar New Year holidays. The MSCI Asia-Pacific index (excluding Japan) rose 0.6%, with South Korea's index up 1.2%, while Japan's Nikkei remained flat as the yen strengthened alongside local bond yields.

In Europe, EUROSTOXX 50 futures dropped 0.5%, FTSE futures fell 0.2%, and DAX futures declined 0.4%, reflecting the lingering uncertainty over potential U.S. trade taxes.

Yen Strengthens

Wall Street futures, which had bounced on Tuesday, faced selling pressure when Alphabet's earnings fell short of expectations, resulting in a 7.6% drop in its shares in after-hours trading, wiping $192 billion off its market value. S&P 500 futures lost 0.4%, and Nasdaq futures fell 0.5% in response. Results from Uber, Ford, Qualcomm, and Walt Disney are due on Wednesday.

Delays in tariffs on Canada and Mexico have eased concerns about the Federal Reserve being limited in its ability to cut interest rates, boosting fund futures. Yields on two-year Treasuries dropped to 4.224%, from a peak of 4.282% on Monday. This decline in yields, combined with a pullback in the dollar, contributed to the dollar index falling to 108.050, from a high of 109.880.

Trump’s suggestion of further tariffs on Chinese goods and his reluctance to speak with Chinese President Xi Jinping about defusing the trade war add further uncertainty. Carol Kong, a currency strategist at Commonwealth Bank of Australia, speculates that China will likely allow its currency to weaken in response to U.S. tariffs and might retaliate with additional measures if the U.S. escalates.

The offshore yuan strengthened slightly to 7.2835 per dollar, recovering from a record low of 7.3765 at the beginning of the week. During Trump's first term, the yuan weakened more than 12% against the dollar due to a series of U.S.-China tariff announcements.

The Australian dollar, seen as a liquid proxy for the yuan, dipped slightly to $0.62565, struggling to extend its 0.47% gain from the previous day. The New Zealand dollar stood at $0.5661.

Currency volatility eased somewhat after a tumultuous start to the week following Trump's steep tariffs on major U.S. trading partners. However, the delay of tariffs on Canada and Mexico, following negotiations, provided some relief. The dollar remained under pressure, allowing battered currencies like the euro to bounce back above the $1.02 level, reaching $1.0385.

The yen was a notable mover, rising about 0.8% to 153.09 per dollar, its highest in over a month. This gain followed data showing a 0.6% year-on-year increase in Japan's December inflation-adjusted real wages, driven by winter bonuses, which fueled optimism that wage hikes are gaining momentum. The euro strengthened to $1.0380, rebounding from its two-year low of $1.0125 earlier in the week. The dollar also retreated to 1.4327 Canadian dollars, down from a 22-year high of 1.4792.

Japanese government bond yields rose to new multi-year highs as the wage data boosted expectations for further tightening by the Bank of Japan.

In commodity markets, gold reached a new all-time high of $2,848 per ounce, benefiting from the weaker dollar and lower yields. Oil prices were weighed down by China's tariffs on U.S. oil imports but found some support from reports that Trump had resumed his "maximum pressure" campaign on Iran to reduce Iranian oil exports to zero. Brent crude fell 35 cents to $75.85 per barrel, and U.S. crude dropped 22 cents to $72.48 per barrel.

 

 

 

Paraphrasing text from "Reuters" all rights reserved by the original author.