Treasuries set for biggest drop in 8 months

The dollar languished near three-year lows after inflation data suggested euro zone interest rates will rise again this summer, while stocks paused for breath and a strong commodities rally tailed off.

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By Mike Peacock

London - The dollar languished near three-year lows on Friday after inflation data suggested euro zone interest rates will rise again this summer, while stocks paused for breath and a strong commodities rally tailed off.

Analysts see little upside for the dollar following the Federal Reserve's pledge this week to continue with near-zero rates for an “extended period” while central banks in Europe, Asia and Latin America are tightening policy.

Inflation in the 17-nation currency bloc edged up to 2.8 percent in April, well above the 2 percent target ceiling of the European Central Bank, which raised rates for the first time in two years earlier this month.

“The inflation numbers support the view that the ECB will deliver another interest rate hike before long. Indeed, although we expect a rate increase at the July meeting, the balance of risks is tilted towards an earlier move,” said Aline Schuiling, senior economist at ABN AMRO.

The euro was trading at $1.4865 by 1045 GMT, close to a 17-month peak of $1.4882 hit on Thursday. The single currency also rose to a six-month high against sterling.

German government bonds slipped after the inflation numbers with the Bund future last at 122.55, 12 ticks lower on the day.

With Thurday's weak US GDP and jobless data offering no relief to the dollar, the index which tracks its performance against a basket of major currencies fell to its lowest since July 2008 this week before recovering somewhat.

The index is down about 7.5 percent this year, making the dollar one of the world's worst-performing assets, and is on track for its biggest weekly fall since mid-January. The dollar also hit a record low against the Swiss franc on Friday.

Sean Callow, a strategist at Westpac in Sydney, said sentiment towards the dollar was “profoundly bearish with no catalyst for reversal”, at least until all-important US non-farm payrolls data next week.

With risk appetite ascendant, partly fuelled by the assumption that rock bottom US rates will continue to drive money into riskier assets, world equities as measured by the MSCI index are up by some 5 percent over the past two weeks, though they were flat on Friday.

European shares were also unchanged following a six-session winning streak, with volumes crimped by a holiday in Britain for the Royal Wedding. US stock index futures pointed to a flat open on Wall Street.

“The (company) earnings season has been more positive than expected, but the concern is that the estimates are being revised negatively and that might be a signal for difficult times ahead,” said Koen De Leus, strategist at KBC Securities in Brussels.

A broad commodity market rally softened with silver pulling back by about 70 cents from Thursday's $49.51 per ounce peak, its highest since 1980, while US crude futures for June had dropped 0.2 percent to $112.65 a barrel by 1045 GMT.

Gold stood at $1,536.80 an ounce after hitting a lifetime high around $1,538 in the previous session.

But further gains are expected unless the dollar recovers.

“If the dollar continues to weaken, then it's only likely to boost gold as well as silver as the inverse relationship between the two assets persists,” said Ong Yi Ling, investment analyst at Phillip Futures in Singapore.

The 19-commodity Reuters-Jefferies CRB index, a broad indicator of the commodity market, is up nearly 10 percent this year, making it the world's best performing asset group.

With the dollar virtually friendless, the Australian dollar stood at $1.0935, within easy reach of a 29-year peak of $1.0948. - Reuters

Source: http://www.iol.co.za/treasuries-set-for-biggest-drop-in-8-months-1.1062759

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