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US Dollar Gains as G7 Communique Bolsters Fed Rate Hike Bets

US Dollar Gains as G7 Communique Bolsters Fed Rate Hike Bets

Ilya Spivak, Head Strategist, APAC

Talking Points:

  • US Dollar gains as G7 opts against “crisis” warning in draft communiqué
  • Moderate posture may pave the way for Federal Reserve interest rate hike
  • Gold, crude oil and S&P 500 futures fall as US front-end bond yields rise

The US Dollar traded higher against its top counterparts while gold and crude oil prices tracked S&P 500 futures downward after leaders of G7 countries released a draft communiqué from their meeting in Ise-Shima, Japan. The greenback advanced alongside front-end US bond yields, suggesting the markets interpreted the document as bolstering the likelihood of a near-term rate hike from the Federal Reserve.

That reading may have followed from Japan’s inability to inject stronger-worded language into the text (although the wording may yet change before the final draft is released). Prime Minister Shinzo Abe suggested the group “recognize the risk of the global economy…falling into a crisis”, warning the gathering that a blow-up on the scale of the one following the 2008 collapse of Lehman Brothers may be ahead.

Abe has previously said he would proceed with a planned sales tax hike in April 2017 unless the economy was threatened by a Lehman-like calamity. Japanese media has speculated that he will delay the increase as soon as next week, which may explain the Premier’s lobbying for international recognition of tectonic threats on the horizon. Justification for the use of aggressively accommodative policy may have been another motivation considering Japan’s recent clash with the US about the former’s ultra-loose monetary stance.

The communiqué said monetary policy alone can’t lead to balanced growth, echoing protestations from global central banks saying they are unable to shoulder the entire burden of boosting performance without assistance from the fiscal side. G7 leaders agreed to a stronger coordinated response to growing downside risks to the global economy while seeking a path forward in accordance with each nation’s peculiar conditions.

On the issue of currencies, the communiqué repeated the familiar trope that excessive and disorderly exchange rate moves are bad for the economy. Leaders agreed to consult each other closely on any actions taken in the FX markets. On the looming “Brexit” referendum, the G7 said a UK exit from the European Union would amount to a serious risk to growth.

--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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