Dollar and government debt rally as Europe tightens Covid restrictions

The dollar rallied on Friday, along with government bonds, as traders reacted to new coronavirus restrictions in Europe.

The dollar index, which measures the US currency against six others, rose 0.3% to its highest level since July 2020. Meanwhile, Brent crude, the benchmark for oil, fell by 1.8% to $ 79.82 per barrel.

The measures came after Austria put in place a lockdown to combat rising Covid-19 cases and Germany, the Czech Republic and Slovakia tightened restrictions on coronaviruses.

The yield on the 10-year Treasury bill fell 0.06 percentage point to 1.527 percent as the price of the benchmark debt rose. The 10-year German Bund yield fell 0.05 percentage point to minus 0.325 percent, its lowest in about two months.

Wall Street’s S&P 500 stock index opened flat, while the European Stoxx 600 index fell 0.3% and a broad FTSE index of emerging markets stocks lost 0.4%.

The euro fell 1% against the dollar to $ 1.12 as traders increased bets on further weakness in the common currency following comments from European Central Bank President Christine Lagarde that the rate-fixing body should not tighten monetary policy “too soon”.

Caroline Simmons, UK Investment Director in UBS’s Wealth Management Unit, said: “We are seeing the [Federal Reserve] raise rates long before the ECB.

The main ECB deposit rate is minus 0.5%. The US central bank, meanwhile, cuts its bond buying program by $ 120 billion per month after annual consumer price inflation peaks at 6.2% in three decades. in October. Markets are also prepared for the Fed to hike interest rates by next summer.

Economic growth in the United States and the euro area is expected to slow next year. But concerns about tighter U.S. monetary policy and global inflation have been mostly manifested in emerging markets, where high inflation is holding back consumer spending and pushing up the costs of dollar-denominated borrowing for businesses.

The FTSE Emerging Markets Equity Index gained just 0.7% in 2021, in dollars. In contrast, the US S&P 500 rose by a quarter and hit a closing high on Thursday as investors applauded a recent period of better-than-expected corporate results and strong retail sales.

“There are strong headwinds for emerging markets. China, inflation, falling immunization rates and the dollar, ”said Ross Mayfield, investment strategist at RW Baird.

“I think these problems can be kept contained,” Mayfield said, without tearing up the United States or the eurozone, whose central banks would be “ready with more stimulus” to tackle economic downturns.

Earlier today, the Hong Kong Hang Seng stock index closed down 1.1% after Chinese e-commerce group Alibaba cut its sales forecast, citing slowing growth in consumer spending. in the second largest economy in the world.

The Turkish lira fell 1% to 11.1 TL to the dollar, around a record low after the country’s central bank cut interest rates on Thursday despite inflation reaching 20% ​​last month.

The South African rand lost 1% to 15.5 per dollar, its lowest level in more than a year.