The U.S. dollar jumped to a 14-month high against the euro on Tuesday as investors bet the Federal Reserve would hike interest rates earlier than expected, a view that knocked down bond prices and helped dampen global equity markets.
The dollar consolidated broad gains from Monday after research from economists at the San Francisco Fed indicated investors may be underestimating when the U.S. central bank is likely to hike rates.
Benchmark U.S. Treasuries yields rose to their highest in over a month and European shares slipped for a third straight session as companies that trade dollar-denominated commodities such as oil took a hit.
The Fed research ramped up expectations that central bankers could signal an earlier-than-expected hike in rates at their policy-setting meeting next week on Sept. 16-17.
Recent data indicating a steadily strengthening U.S. economy also has bolstered the camp that believes rates may rise sooner than the mid-2015 consensus the market has expected.
“The Fed’s projections for the path of interest rates are already more materially aggressive, more rapid hikes, than the market implies by its pricing,” said Jake Lowery, fixed income portfolio manager at Voya Investment Management in Atlanta.
“The data over the last three months would at least give the Fed more confidence in that base case scenario,” he said.
The euro fell to a 14-month low of $1.2860 in European trading before rebounding to trade 0.18 percent higher at $1.2917. The greenback rose to a six-year high of 106.47 yen and last traded at 106.38 yen, up 0.34 percent.
The benchmark 10-year U.S. Treasury note fell 9/32 in price to push its yield up to 2.5018. German bund futures fell 70 ticks to settle at 148.40
Stocks were mostly lower worldwide, with the exception of Canada, where the Toronto Stock Exchange’s S&P/TSX composite index was 0.18 percent higher.
MSCI’s all-country index fell 0.5 percent to 428.74, and the FTSEurofirst 300 index of European shares closed down 0.35 percent to 1,385.51.
On Wall Street, the Dow Jones industrial average fell 57.96 points, or 0.34 percent, at 17,053.46. The Standard & Poor’s 500 Index was down 5.73 points, or 0.29 percent, at 1,995.81. The Nasdaq Composite Index was down 10.76 points, or 0.23 percent, at 4,581.53.
Brent crude oil prices fell back below $100 per barrel in volatile trade, down for a fourth day and under pressure from strong supplies.
Brent fell 67 cents at $99.53 a barrel. U.S. crude was 28 cents higher at $92.54 a barrel.
U.S. crude’s relative strength is because it is less affected by demand weakness in Europe and because of data due later on Tuesday and Wednesday that is likely to show a fall in U.S. stockpiles, said Andrey Kryuchenkov, analyst at VTB Capital.