By Amanda Cooper
LONDON (Reuters) – Global shares and the U.S. dollar edged up on Wednesday as investors made last-minute adjustments to portfolios in the countdown to the year’s final flurry of central bank meetings, while news of a potential Nissan-Honda tie-up lifted car stocks.
The dollar traded at multi-month, and even multi-year, highs against a range of currencies, including the Australian, New Zealand and Canadian dollars, ahead of the U.S. Federal Reserve’s decision on interest rates later in the day.
The Fed is expected to cut rates by a quarter point, but to signal a cautious approach to loosening monetary policy next year.
were up 0.2%, suggesting a small rise at the opening bell later.
Traders are almost certain the Fed will move the funds rate window 25 basis points lower – from its current 4.5-4.75% range – but lift its long-run interest rate projections.
“Markets will focus on two things. The key message has been telegraphed: you’ll certainly get a cut. But you’ll get a ‘hawkish cut’, in the sense that they will communicate and guide for a slower pace of cutting to a higher terminal rate,” Samy Chaar, economist at Lombard Odier in Geneva, said.
Chaar said his expectation was for a revision to the so-called dot plot – Fed policymakers’ quarterly economic projections, including rate forecasts – to show rates levelling out around 4%, rather than the 3.5% markets have priced in, meaning quarterly cuts from the Fed, rather than meeting-by-meeting cuts.
In the last update in September, Fed members’ median projection for rates was for 3.4% at the end of next year and for a long-run neutral rate of 2.9% – well below current market estimates for a long-term neutral rate of around 3.8%.
Traders have been driving up U.S. yields and the dollar accordingly, with benchmark 10-year yields touching one-month highs around 4.4% overnight, before settling at 4.39%.
MIGHTY DOLLAR
The dollar has risen 1.13% against a basket of six other currencies this month. December is typically the weakest month of the year for returns for the U.S. currency, as investors tend to tidy up their positions ahead of the end of the year.
This year is the dollar’s strongest performance for a December since 2014.
A tougher-talking Fed could see the dollar extend this rally.
“We see risks of U.S. dollar strength as expectations of a cut in March could decline further post-announcements,” strategists at MUFG said in a note.
The euro was mostly steady on the day at $1.04925, while the yen weakened, leaving the dollar up 0.15% at 153.68.
Sterling dipped after data showed UK consumer inflation rose a touch more than expected in November. The pound rallied on Tuesday after a separate report showed an unexpected pickup in British wages, which already watered down expectations for interest rate cuts next year.
The Bank of England meets on Thursday and is not expected to make any changes to monetary policy. Markets are pricing in around two quarter-point cuts next year.
At $1.2700, the pound is flat for the year and the best performing G10 currency against the dollar, while it is also within range of post-Brexit vote highs on the euro.
Beyond currencies, automaker stocks were in focus in Europe, after two people said Japanese rivals Honda (NYSE:) and Nissan (OTC:) were in talks to deepen their ties, including a possible merger.
French manufacturer Renault (EPA:) was the stand-out performer, rising more than 6%, as the company owns a large stake in Nissan. Paris’ was up 0.2%, roughly in line with the
Oil prices edged up ahead of the anticipated rate cut from the Fed later. Lower borrowing costs can stimulate demand for fuels. was up 0.5% at $73.57 a barrel.
