Dollar Sinks to 15-Month Low in Risk-On Mood

The risk-on mood in markets stretched into another day as US futures climbed and the dollar weakened to a 15-month low, Bloomberg reporetd.

European stocks held gains from yesterday’s rally, which saw the Stoxx 600 Index surge 1.5%. Swatch Group AG, the maker of Omega and Longines watches, rallied almost 6% as China’s reopening fueled a jump in profits. Watches of Switzerland Group Plc, the biggest retailer of Rolex watches in the UK, soared 10%.

Investors are still responding to data released on Wednesday that showed the US inflation rate slid to a two-year low, easing worries over higher interest rates and a potential recession. A report on US producer prices is due later today and expected to show a decline from a year ago, according to the median estimate of economists surveyed by Bloomberg.

“Since last summer, producer prices have benefited from the loosening of supply chains and declining commodity prices,” Jonathan Church at Bloomberg Economics wrote. “With ongoing goods disinflation in the pipeline, this trend is expected to continue.”

The MSCI Asia Pacific Index headed for the highest close in more than three weeks, with stocks in Hong Kong recording some of the biggest gains. Chinese Premier Li Qiang met with senior executives from firms including Alibaba Group Holding Ltd. and ByteDance Ltd., a sign that the government is ending its crackdown on the technology industry.

Some top money managers said the dollar is poised for further losses as US exceptionalism wanes.

“The recent USD underperformance reflects a qualitative shift in market comfort with being short USD as the terminal Fed policy rate looks increasingly capped,” Steven Englander, head of global G-10 FX research and North America strategy for Standard Chartered Bank, wrote in a note.

Bond yields were broadly lower. The yield on two-year Treasuries, which is more sensitive to imminent policy moves, dropped around six basis points to 4.68% after sliding 13 basis points Wednesday on the inflation data.

US consumer price index slid to 3% in June year-on-year, down from 4% in May. The core measure — which economists view as the better indicator of underlying inflation — dropped to 4.8%, the lowest since 2021. While traders predict the Fed will still go ahead with one more rate hike this month, the likelihood of further increases appears to be receding.

Brandywine Global Investment Management expects the Fed to tighten by 25 basis points this month and then pause. “We’ve moved beyond that sort of crisis mentality around inflation,” portfolio manager Jack McIntyre told Bloomberg Television. “The rhetoric coming from the Fed post-FOMC should be a lot less hawkish.”