The dollar retreated on Friday on concerns among some investors that the Federal Reserve’s new inflation goal could dent the appeal of US assets.
The currency fell 0.7 per cent against a basket of half a dozen peers. Sterling rallied to $1.3289, its highest level of 2020, while the euro advanced to $1.1914. The dollar dropped against the yen, fetching ¥106 in recent dealings in Europe.
Friday’s selling came after Jay Powell, Fed chairman, said the central bank would shift its inflation target to an “average” of 2 per cent. The decision will give the Fed more flexibility to continue its highly accommodative monetary policy for longer into the future since it allows for a modest overshoot in price growth.
Some analysts said they were worried that the combination of ultra-low interest rates for years to come, along with the spectre of higher inflation, would harm the returns investors hope to glean from holding US bonds and other assets, such as dividend paying stocks.
“This points to a bearish dollar outlook for quarters to come,” said Chris Turner, a strategist at ING. He said so-called real yields, a measure of the return investors garner above the inflation rate, “will remain low and should even go (initially) lower if the Fed succeeds in generating higher domestic price pressures”.
The dollar has tumbled 3.9 per cent since the end of last year, in part because of concerns over low real yields and also over the country’s handling of the coronavirus crisis.
US government bonds weakened on Friday having taken a blow after Mr Powell’s remarks at the virtual Jackson Hole conference the previous day. Higher levels of inflation are seen as a negative for bonds, especially those of longer maturities.
Yields on 10-year US Treasuries, which move inversely to bond prices, rose 0.021 percentage points to 0.77 per cent in mid-morning European trading on Friday in response to the Fed’s policy change.
That brought the 10-year yield to its highest level in more than two months as it added to Thursday’s jump of 0.06 percentage points.
A sell-off in longer-dated Treasuries pushed the gap between five and 30-year Treasury yields to its widest in three months as the Fed’s announcement eroded investor hopes for returns on longer dated US debt.
Gold, which often serves as a haven when inflation fears rise, was up 0.9 per cent at $1,951 a troy ounce.
Still, not all investors were confident that the Fed’s new aim would lead to sharp rises in price growth in the future.
“It’s not a significant paradigm shift,” said Allison Boxer, US economist and Joachim Fels’ economic adviser at Pimco, one of the world’s biggest money managers, in a note on Friday.
“With today’s high level of slack in the economy expected to dissipate only gradually, we think fiscal policy, not monetary policy, will be the key determinant of the Fed’s success in reaching its inflation objective over the next several years,” she added.
In equities, European stocks declined with the regional Stoxx 600 index down about 0.3 per cent. Markets in Frankfurt, Paris and London were all under selling pressure. US futures rose 0.3 per cent.
Asian markets other than Japan rose on Friday after Wall Street closed slightly higher, with the S&P 500 ending the day up 0.2 per cent after touching an intraday record. Tokyo’s Topix index fell 0.7 per cent.
Hong Kong’s Hang Seng accelerated its gains to 1.7 per cent and China’s CSI 300 index of Shanghai and Shenzhen-listed stocks advanced 2.4 per cent.