Global markets suffered a sharp sell-off yesterday amid fears of an early interest rate rise in the United States, renewed concerns about Greece and signs of a slowdown in China.
As the dollar hit a 12-year high in anticipation of the US Federal Reserve starting to increase rates as soon as June, analysts warned of the toll that a strong currency would take on American corporate profits.
At the same time, European policymakers threatened to withhold funds from Greece unless Athens got on with the reforms it has promised, provoking another wave of panic about a eurozone break-up.
The euro hit another 12-year low against the dollar, falling more than 1 per cent to $1.06965 — breaching the $1.07 threshold. Sterling rose by 1 per cent against the euro to €1.4079 but dropped 0.33 per cent against the dollar to $1.5078.
Mark Carney, the Bank of England governor, conceded that the plunging euro would make it harder for exporters. However, he said that QE was good because it reduced the risk of another eurozone crisis still further. “Overall, we still think it is net positive for the UK,” Mr Carney said.
Advertisement
In China, poorer-than-expected producer prices pointed to weak domestic demand, hitting commodity markets and sending energy stocks lower. The stronger dollar also dented demand prospects by making oil and other commodities more expensive for non-US buyers. Brent crude fell 3.2 per cent to $56.66 a barrel and copper dropped 1.8 per cent to $5,762 a tonne.
Mounting concerns about economic pinch-points that could hold back the global recovery rattled investors and hit stock markets. On Wall Street, the Dow Jones industrial average fell 332.78 points to 17,662.94, the S&P 500 lost 35.26 points to 2,044.17 and the Nasdaq Composite dropped 82.64 points to 4,859.79. In London, the FTSE 100 was hammered, slumping 173 points to 6,702 points — its biggest one-day fall in five months.
Traders said that the selling had been driven largely by the prospect of imminent monetary policy tightening in America. That pushed the dollar to its highest level since 2003 against a basket of currencies, prompting a warning from Jason Furman, chairman of the White House Council of Economic Advisers, that the surging greenback would be a headwind for US growth.
The dollar’s rally has gathered pace since Friday’s surprisingly strong US jobs data, which changed the Wall Street consensus. A poll by Reuters found that the majority of US top economists believed the Fed would start raising rates in June.
In Europe, policymakers warned that the crisis over Greece could flare up again unless Athens kept its side of the bargain struck last month with its bailout creditors to extend vital funding.
Advertisement
Wolfgang Schäuble, the German finance minister, emphasised that no aid would be handed to Greece until international lenders had agreed that it had delivered on its reform commitments. “Greece must talk to the institutions to ensure that the memorandum of understanding is fulfilled,” he said after a meeting of European finance ministers. “Only when this condition has been met is there a possibility for payment to be made from the programme.”
Jeroen Dijsselbloem, the eurogroup president, added that negotiations over the package of budget reforms Athens must implement in return for funding must start today.