13/10/2016
Fed Rate­Rise Plan Hits Snag in Stronger Dollar, Higher Long­Term Yields ­ WSJ
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MARKETS
Fed Rate-Rise Plan Hits Snag in
Stronger Dollar, Higher Long-Term
Yields
An October surge in the U.S. dollar is reawakening concerns over financial markets’
vulnerability to a likely Federal Reserve rate increase
A rising dollar stands to hit U.S. corporate earnings at a time they are already under pressure. PHOTO: RON
ANTONELLI/BLOOMBERG NEWS
By MIN ZENG
Oct. 12, 2016 6:19 p.m. ET
An October surge in the U.S. dollar is reawakening concerns over financial markets’
vulnerability to a likely Federal Reserve rate increase.
The WSJ Dollar index rose for the eighth time in the past 10 trading days, hitting a high
last seen in the spring. It has risen 2.4% this month. China set the value of the yuan at a
six-year low Wednesday, while currencies in major emerging markets such as Brazil,
Russia, Mexico declined against the dollar.
The dollar’s strengthening has been accompanied by an increase in long-term bond
yields, reflecting wagers that the Fed will raise rates as soon as December, and an
autumn recovery in market inflation expectations fueled by oil-price gains. On
Wednesday, the 10-year U.S. Treasury yield rose by about 0.02 percentage point to
1.778%, its highest close since early June, while Nymex crude closed above $50 for a
third consecutive day.
The increases in the dollar and U.S. bond yields so far have been modest, while the prices
of riskier assets such as stocks have been largely unaffected. The Dow Jones Industrial
Average on Wednesday rose 15.54 points to 18144.20.
But many investors say that continued rises in the dollar and bond yields could
complicate the Fed’s plans to raise interest rates this year for the second time since the
financial crisis, by potentially spurring renewed capital outflows from emerging
markets.
“Clearly a significant tightening of financial conditions with a strong dollar rally and
higher bond yields would be of concern for the Fed,’’ said Gemma Wright-Casparius,
senior portfolio manager of the fixed-income group at the Vanguard Group.
A stronger dollar is generally good for the U.S. economy, boosting the purchasing power
of consumers and businesses while holding down inflation.
But a rising dollar also stands to hit U.S. corporate earnings at a time when they already
are under pressure and stock valuations are broadly seen as stretched. It also threatens
to hamstring policy makers’ efforts to generate modest inflation gains.
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13/10/2016
Fed Rate­Rise Plan Hits Snag in Stronger Dollar, Higher Long­Term Yields ­ WSJ
“This Fed is more market
dependent than data
dependent,’’ said Donald
Ellenberger, head of
multisector strategies at
asset-management firm
Federated Investors. If stocks
drop significantly prior to the
December meeting, he said,
“the Fed is very unlikely to
raise rates.”
Fed officials meeting in
September laid the
groundwork to raise shortterm interest rates “relatively
soon,” according to minutes of
the meeting released
Wednesday afternoon,
although the officials struggled to reconcile internal divisions over the timing of the
next rate move.
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Federal-fund futures on Wednesday
reflected a 70% probability of a rate
increase by the Fed’s meeting in
December, according to data from
CME Group. The odds were around
50% a month ago and nearly zero soon
after the Brexit vote.
Eurodollar futures showed the value of net bets wagering on higher interest rates in the
U.S. hit a two-year high of $1.255 trillion for the week ended Oct. 4, according to data
from TD Securities.
Rising-rate expectations are pushing government-bond yields in the developed world
higher after a sharp midyear decline.
The yield on the 10-year German bund yield has risen back above zero again this month,
while the 10-year U.K. gilt yield topped 1% Wednesday.
Some analysts say the Fed should welcome the rise in bond yields because it reflects
higher confidence among investors over the growth and inflation outlook.
As a result, some investors are selling Treasury bonds and buying Treasury inflationprotected securities in a bid to hedge inflation risks that are perceived to be on the
upswing.
The so-called 10-year break-even rate, the yield spread between the 10-year Treasury
note and the 10-year Treasury inflation-protected security, was 1.65 percentage point
late Wednesday, a five-month high, according to Tradeweb. The figure suggests
investors expect annual U.S. inflation of 1.65% in the next 10 years.
To be sure, few believe inflation is making significant inroads at the moment. The Fed’s
favored inflation measure has been below the central bank’s targets for more than four
years. Skeptics point to continuing challenges, such as rising debt and slowing growth in
China.
The People’s Bank of China set the daily midpoint for the dollar-yuan pair at 6.7258 on
Wednesday, marking a 0.24% decline in the yuan from Tuesday’s midpoint. Wednesday’s
fixing put the yuan at its lowest level against the dollar since September 2010.
The prospect of slowing growth has been driving money moving out of China and
causing the value of the Chinese yuan to weaken. Analysts say China is unlikely to allow
disorderly depreciation in the yuan, and that the People’s Bank of China is going to
intervene on signs of chaotic yuan moves.
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13/10/2016
Fed Rate­Rise Plan Hits Snag in Stronger Dollar, Higher Long­Term Yields ­ WSJ
Eric Stein, co-director of global income at asset management firm Eaton Vance
Management, said markets “seem far less sensitive” to the yuan’s weakness this time
than they were in the market declines of August 2015 and January 2016.
“I don’t think a weaker yuan per se will stop the Fed in its tracks,’’ he said. ”But if
financial conditions broadly tighten, that could stop the Fed from hiking or least force
them” to emphasize they don’t expect long-term rates to rise sharply.
—Saumya Vaishampayan contributed to this article.
Write to Min Zeng at [email protected]
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