Dollar Soars as Equity Markets Struggle to Remain Afloat

The stock market across the US and Europe stumbled last week after the US dollar (USD) jumped to a multi-decade top, with bonds suffering a sell-off. This comes as the US Federal Reserve increases its interest rates to tame ballooning inflation as many economies go into recession.

The Dow Jones came close to triggering a full-blown bear market as business activities across the US and eurozone contracted for the third consecutive month in September, plunging Wall Street into a bloodied state.

Dollar Reaping the Benefits of an Ultra-Aggressive Fed Outlook

In the UK, the British currency (GBP) and debt prices dropped further last week after the British government announced robust debt-financed tax cuts that could boost borrowing. This sent the local bond yields on their most significant upward movement in decades.

Meanwhile, the euro (EUR) slumped to a 20-year low and the pound to a 37-year low, as the greenback broke through record tops as the Fed adopted a long-term tightening outlook.

Commenting on the ongoing market outlook, George Goncalves, head of US macro strategy at MUFG, noted that the prevailing Fed mechanism could result in a market investors have not witnessed in a long time. Goncalves explained: “It’s something we’re not used to, [and] that’s why it’s more surprising for most.”

He added: “It’s going to be a long staring contest between the Fed and the markets, and in the middle is the economy which is not responding yet to this tightening.”

Also, Andrzej Skiba, head of the BlueBay US fixed income team at RBC Global Asset Management, noted that investors are struggling to get on top of the inflation situation and how high rate hikes could go. Referring to the Fed rate projection of 4.6% by late 2023, he explained: “There’s unease in the market about having confidence that we know how inflation will develop and that yields will indeed peak in the mid-high 4s.” Skiba added:

“People have been reflecting on that uncertainty, and it might mean more tightening ahead, it might mean even more tightening of financial conditions that the markets have to go through.”