Dollar rallies, stocks sink as traders prepare for big rate hikes

The dollar surged Wednesday against other major currencies and equities sank after a forecast-beating US economic report gave new life to talk of a third straight blockbuster interest rate hike next month.

The services sector data showed the world’s top economy remained resilient in the face of surging prices and borrowing costs, highlighting the job the Federal Reserve has in taming inflation while trying to prevent a recession -- a goal many observers doubt can be achieved.

The reading added to the gloom blanketing trading floors as investors face a range of headwinds including a worsening energy crisis in Europe, Russia’s war in Ukraine and Chinese economic woes caused by Covid-19 lockdowns.

“Overall, the (services) survey paints a picture of solid activity in the services sector of the US economy supported by wages growth suggesting the Fed still has more work to do in order to cool the economy,” said National Australia Bank’s Rodrigo Catril.

All three main indexes on Wall Street finished in the red Tuesday as they reopened after a long weekend, with expectations growing that the Fed will announce a third successive 75 basis-point rate hike later this month.

Several top Fed officials -- including head Jerome Powell -- have lined up in recent weeks to say their main focus is bringing inflation down from four-decade highs, even if that means tipping the economy into recession.

The prospect of more big rate hikes has sent the dollar soaring this year, and on Wednesday it hit a new 24-year high of 144.38 yen before easing back slightly.

The yen’s losses continued to mount despite comments from government officials hinting at possible intervention to provide support, though there was no sign the Bank of Japan would shift from its ultra-loose monetary policies aimed at kickstarting the economy.

The euro remained lodged below parity with the dollar and at a 20-year low, even as the European Central Bank prepares to ramp up rates, having done so in July for the first time in eight years.

And the greenback was also pushing towards a 37-year peak against sterling, which saw a brief rally Tuesday on reports new UK Prime Minister Liz Truss was planning a £130 billion ($150 billion) package to freeze energy bills.

China export weakness

The losses in New York were tracked by Asia, where Hong Kong, Tokyo, Sydney, Seoul, Singapore, Taipei, Wellington, Mumbai, Jakarta and Manila all fell, though Shanghai and Bangkok edged up.

London, Paris and Frankfurt joined the sell-off in early business.

“The September swoon is in play as a resilient economy paves the way for more Fed tightening,” said OANDA’s Edward Moya.

“Stocks are going to struggle because too much of the (US) economy is doing well. The dovish pivot and the end of interest rate hikes with the December (Fed meeting) is not how this will play out.”

In a sign of the weakness in the global economy and the impact China’s zero-Covid policies are having, Beijing released data showing the country’s exports grew far sharper in August than in July.

The figures, which were also well off forecasts, “merely serve to underscore how weak domestic demand still is, and how far away that end of year GDP target of 5.5 per cent is”, said CMC Markets’ Michael Hewson.

“The target may well have been downgraded to an aspiration only last month, but it’s further away than ever after today’s data and we could be lucky to see half that number at this rate.”

China’s lockdown and the stronger dollar and expectations that leading economies will tip into recession continue to push oil prices lower, with both main contracts down more than one per cent on Wednesday.

Bets on a plunge in demand have seen the commodity tank about 20 per cent in recent months, putting them below the levels seen just before Russia invaded Ukraine and sent prices skyrocketing.

And while concerns remain about supplies, OANDA’s Moya added: “The short-term crude demand outlook appears to be poised for another wave of China Covid-related lockdowns.

“Despite some better-than-expected US services data, global growth isn’t looking good at all and that is trouble for crude prices.”