The US dollar managed to shore up some of the previous session’s losses as risk appetite diminished, treasury yields were lower and markets were expecting the release of the minutes from the September Federal Reserve meeting to get clues about future interest rate moves.
The International Monetary Fund, in its flagship semi-annual World Economic Outlook publication, downgraded its global growth forecast for next year down to 3.8% from 4.0%. The International Monetary Fund also warned that equity markets were trading at frothy levels and that the risk of a correction had increased. The Fund was particularly downbeat about Japan and the Eurozone, saying the two economies would expand by 0.8% and 1.3% respectively next year. There was some slightly upbeat news about the US economy, as it forecast growth of 3.1% there. The news again underlined the case in favor of a stronger US dollar, as the US economy is outperforming other major economies and dollar interest rates would soon have to rise. The New York Fed President during a speech yesterday said it was reasonable to expect the first rate hike in mid-2015. The euro rose to as high as 1.2682 the previous day but tumbled back to 1.2625 as the IMF gave the chances of a recession in the Eurozone at 30%.
The IMF report scared some investors and this caused some serious losses for equities. Flows into safe haven US government bonds meant lower yields, which removed some support from the US dollar. The 10-year Treasury yield fell to as low as 2.34% in late New York trading, but yields rebounded somewhat to 2.36% during today’s Asian trading. As equities fell, the safe yen rose and dollar / yen briefly traded below 108. It was last trading at 108.44.
As China returned to work from the Golden week holiday, the HSBC Services PMI dropped to 53.5 in September from 54.1 the previous month. The aussie was the biggest loser after Statistics Australia said it was revising the previous 3 months’ employment data. It fell below 88 cents against the US dollar to 0.8770. The August figures greatly surprised on the upside and there were fears that they would be revised substantially down following the adjustment. September Australian employment numbers are due out tomorrow.