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Asia stocks gain, dollar struggles as Fed sets stage for rate cut

Comments / {{hitsCtrl.values.hits}} Views / Friday, 12 July 2019 00:00

TOKYO (Reuters): Asian stocks advanced and the dollar struggled on Thursday, after Federal Reserve Chairman Jerome Powell reinforced prospects for a US interest rate cut later this month.

The pan-region Euro Stoxx 50 futures were up 0.43%, Germany’s DAX futures rose 0.42% and Britain’s FTSE futures gained 0.33% in early European trade.

In his first day of testimony before Congress on Wednesday, Powell confirmed that the US economy was still under threat from disappointing factory activity, tame inflation and a simmering trade war.

Powell said the central bank stands ready to “act as appropriate”.

MSCI’s broadest index of Asia-Pacific shares outside Japan rose 1%, while Japan’s Nikkei added 0.5%.

The Shanghai Composite Index edged up 0.3%, South Korea’s KOSPI climbed 1.2% and Australian stocks advanced 0.6%.

US stocks ended higher on Wednesday and the S&P 500 briefly crossed the 3,000-point mark for the first time following Powell’s remarks.

“The markets had hoped for Powell to express dovish views and they got what they wanted,” said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui DS Asset Management.

“The focus going forward is US data, such as tonight’s CPI, and whether the economy warrants a 50 basis point rate cut this month.”

A strong June US jobs report released earlier this month had curbed market expectations that the Fed could lower rates by 50 basis points (bps), and the markets had viewed a 25 bps cut as a more likely option.

But the Fed chairman’s cautious stance on the world’s largest economy helped revive some bets on heftier easing at its next policy meeting on 30-31 July.

The chance of a 50 bps cut rose to 27.6% from 3.3% on Tuesday, according to CME Group’s FedWatch tool.

Minutes from the Fed’s last meeting in mid-June, however, showed some policymakers felt there was not yet a strong case for easing.

The dollar index against a basket of six major currencies was down 0.25% at 96.873 and extended losses from Wednesday, when it fell back from a three-week peak of 97.588 in the wake of Powell’s comments. “Although our U.S. economists have pencilled in a total of 50 bps of rate cuts for 2019, this does not change our near-term view for moderate dollar gains within G10,” wrote Daria Parkhomenko, strategist at RBC Capital Markets.

The dollar would remain the highest yielding G10 currency and that should lend it support, Parkhomenko added.  The greenback was down 0.5% at 107.960 yen, forced off a six-week high of 108.990 scaled the previous day. It was still some distance away from a six-month trough of 106.780 set on 25 June.

The euro nudged up 0.25% to $1.1278.

The Australian dollar stretched the previous day’s rally, rising 0.2% to $0.6974 against the broadly weaker dollar. The surge helped the Aussie move away from a 2-1/2-week trough of $0.6910.

The 10-year US Treasury yield was 2 basis points lower at 2.040% after dropping on Wednesday from a three-week high of 2.113% following the Fed chief’s congressional testimony.

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