Dollar strengthens as global growth and inflation fears mount

Investors sought out the safety of the dollar and sold the euro on Thursday, as fears over further interest rate rises and slowing global economic growth stalked markets.

The dollar index, which measures the strength of the US currency against a basket of six others, rose 1 per cent to 104.83 points, a level it last touched in 2002. Other major currencies weakened, with the euro down as much as 1.5 per cent at $ 1,035, brushing up against its lowest point since 2017.

Stock markets gyrated, giving up early gains to trade negative for much of the day before a late rally left both the S&P 500 and the tech-heavy Nasdaq Composite closing roughly flat.

Prices of key commodities such as copper fell, and yields on longer-term bonds were again under pressure as concerns about US economic growth dogged investors.

“The Fed is under pressure to raise rates again and the move has to be quick into the summer. Then we will see an impact on [economic] growth in the second part of the year, ”said Juliette Cohen, a strategist at CPR Asset Management.

Sterling fell 0.5 per cent against the dollar, as data showing that the UK economy unexpectedly shrank for the first time this year heaped further pressure on British currency. China’s renminbi lost 1 per cent to 6.78 per dollar, in the latest sign that Beijing authorities are permitting the tightly controlled currency to weaken to stimulate flagging demand for the nation’s exports.

Analysts at ING wrote that, given fears of an economic slowdown and further rates tightening, “it is not surprising to see the dollar remain strong”.

European equities pulled back some of their early losses but US markets struggled for direction following heavy falls on Wednesday.

In Europe, the Euro Stoxx 600 finished down 0.7 per cent, while the FTSE 100 ended down 1.6 per cent. Japan’s Topix and Hong Kong’s Hang Seng closed 1.2 per cent and 2.2 per cent lower respectively.

Robert Buckland, an analyst at Citi, said: “Global equities are moving to price in the three key stagflation themes: higher inflation, slowing growth, and rising rates.”

In bond markets, the 10-year Treasury yield fell by 0.04 percentage points to 2.87 per cent. Yields fall as bond prices rise.

Growth is also under pressure from declining coronavirus pandemic-era fiscal support, supply chain bottlenecks and a slowdown in China driven by stringent coronavirus lockdowns, Cohen added. “That’s a gloomy environment for markets,” she said.

The price of copper, an indicator of economic sentiment due to the metal’s widespread use, dropped below $ 9,000 per ton for the first time in more than six months.

“Chinese demand is extremely weak,” said Colin Hamilton, analyst at BMO Capital Markets, even though smelter constraints that had held up prices in China had now eased.

Additional reporting by Neil Hume and Jennifer Creery

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