Rampant dollar pauses for breath as bears stalk stocks

By Xie Yu

HONG KONG (Reuters) – Asian markets attempted to stabilise on Tuesday after a wild few days during which most assets, barring the dollar, fell, with the greenback easing a bit and stocks flat.

Sterling, which collapsed to a record low $1.0327 on Monday, recovered to $1.0772. S&P 500 futures rose 0.7% and Europe futures rose 0.6%.

MSCI’s broadest index of Asia shares outside Japan fell 0.3%, the smallest fall in five straight sessions of losses, even if it hit another two-year low. Japan’s Nikkei was up by 0.5%.

Analysts were doubtful about the outlook, however, as markets – already jittery at the prospect of U.S. interest rates staying higher for longer – have been unnerved by the upheaval in British assets in response to government spending plans.

Britain plans tax cuts on top of huge energy subsidies, and a lack of confidence in the strategy and its funding hammered gilts and the pound on Friday and again on Monday.

The yield on five-year gilts is up a stunning 100 basis points in two trading days.

“(It) is definitely something that’s unfolding…probably we’re only at a certain initial stage of seeing how the market digests that kind of information,” said Yuting Shao, macro strategist at State Street Global Markets.

“Of course the tax cut plan itself was really aimed to stimulate growth, reduce household burdens, but it does raise the question of what the implications are in terms of the monetary policies.”

After the pound’s plunge, the Bank of England said it would not hesitate to change interest rates and was monitoring markets “very closely”.

Bank of England Chief Economist Huw Pill will speak on a panel at 1100 GMT and will likely be pressed for more details.

BEAR TERRITORY

Spillover from Britain kept other assets on edge.

Bond selling in Japan pushed yields up to the Bank of Japan’s ceiling and prompted more unscheduled buying from the central bank in response. [JP/]

Wall Street fell deeper into a bear market on Monday, benchmark 10-year Treasury yields rose more than 20 bps to a 12-year high of 3.933% and the dollar was bid.

“There could easily be another leg down as classic signs of market capitulation, such as the VIX Index reaching the key 40 level, have not occurred — although we are getting closer,” said Invesco’s chief strategist Kristina Hooper.

The VIX, known as Wall Street’s “fear gauge”, hit a three-month high of 32.88 on Monday.

Investors are watching out for a slew of speeches by central bank officials this week, with the Fed’s Charles Evans speaking at 0730 GMT on Tuesday.

Expectations are for a small lift to 104.5 from 103.2 in the U.S. Conference Board consumer confidence later in the day.

The dollar index on Tuesday eased 0.2% to 113.71, after earlier touching 114.58, its strongest since May 2002.

The European single currency was up 0.3% on the day at $0.9636 after hitting a 20-year low a day ago.

Oil and gold nursed losses. Gold, which hit a 2-1/2 year low on Monday, rose 0.6% to $1,631 an ounce. Oil lifted slightly from its lowest levels since January. [O/R]

U.S. crude ticked up 0.8% to $77.35 a barrel. Brent crude rose to $84.8 per barrel.

Bitcoin broke above $20,000 on Tuesday for the first time in about a week, as cryptocurrencies bounced, along with other risk-sensitive assets.

(Reporting by Xie Yu; Editing by Edmund Klamann and Muralikumar Anantharaman)

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