Asian shares stumbled to near 2-1/2-month lows on Tuesday and the U.S. dollar pared some of its recent losses as investors worried about the likelihood of a U.S. interest rate increase in coming weeks.
MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS slid 0.5 percent, taking its losses to more than 7 percent so far this month and nearing its lowest levels since March 9.
Financial spreadbetters at IG expected Britain’s FTSE 100 .FTSE to open 0.3 percent lower, Germany’s DAX .GDAXI 0.2 percent and France’s CAC .FCHI 0.4 percent.
“The market seems to be taking a cautious stance ahead of the Fed Chair Janet Yellen’s speech later this week,” said Jung Sung-yoon, a foreign exchange analyst at Hyundai Futures.
A string of comments in recent weeks by Federal Reserve officials and minutes of the last Fed meeting have put a possible rate hike firmly on the table for June or July, reviving the dollar but cooling appetite for riskier assets, even if markets are not totally convinced a tightening will come so soon.
Philadelphia Fed President Patrick Harker said on Monday that a hike in June is appropriate unless data weakens, while St. Louis Fed President James Bullard said holding rates too low for too long could cause financial instability.
With economic growth across emerging markets showing fresh signs of flagging – ratings agency Moody’s expects growth in G20 emerging markets to ease to 4.2 percent in 2016 compared to 4.4 percent last year – investors are growing more bearish on the outlook for stocks.
Shares in China .SSEC and Japan .N225 led regional markets down with 0.7 percent losses each, though some investors were wary of chasing markets lower after their recent retreat.
Yang Hai, analyst at Kaiyuan Securities, said trading will likely remain dull for a while as economic sluggishness discourages investor participation.
“The current economic environment doesn’t justify a sustainable rebound. In addition, regulators are reducing leverage in the asset management industry so money is not flowing in.”
The dollar trimmed some of its losses against the yen after skidding nearly 1 percent in the previous session to a low of 109.12. It was last up 0.04 percent at 109.40 yen JPY=, moving back toward Friday’s three-week high of 110.59.
Data on Monday showed Japan posted a trade surplus for the third consecutive month, and a Group of Seven finance ministers’ meeting concluded on Saturday with a U.S. warning to Japan against intervention to weaken the yen.
But overall, the dollar was bolstered by growing bets that the Fed was gearing up to raise interest rates sooner than many investors had expected, despite signs of persistent global weakness.
“The yen gained as risk aversion overcame the Fed officials’ hawkish views. Upward pressure on the yen was stronger due to weaker stocks and falling commodities,” said Junichi Ishikawa, FX analyst at IG Securities in Tokyo.
“That said, the dollar index has stood tall overall amid a significant rise in the two-year U.S. Treasury yield. Trades preparing for a potential Fed rate hike in June are likely to continue.”
Fed Chair Janet Yellen will appear at a panel at Harvard University on Friday, a day on which investors will also see the second estimate of U.S. first-quarter growth. Markets also await comments from other Fed officials this week, as well as data on new home sales, durable goods orders and consumer sentiment.
The dollar index, which tracks the U.S. unit against a basket of six major counterparts, was up a shade at 95.33, still within sight of Thursday’s peak of 95.520, its loftiest level since March 29.
The euro edged down 0.1 percent to $1.1210 EUR=, holding above last week’s low of $1.1180, its weakest since late March.
Crude oil futures stabilized after dropping on Monday as Iran vowed to ramp up output and as the number of rigs drilling for crude in the United States held steady after declining for eight straight weeks. [O/R]
U.S. crude CLc1 slipped 0.2 percent to $47.91 a barrel, while Brent LCOc1 was off 0.3 percent at $48.21.