US recap: Dollar surges as sterling implodes, hard-landing fears abound

Sept 23 (Reuters) – The dollar vaulted higher on Friday as sterling wilted 3% on UK fiscal fears and dismal euro zone PMI data heightened worries about the withering global economy after the Fed piled on another aggressive rate hike this week and signaled more to come.

Unfunded UK fiscal stimulus plans suggested the BoE’s underwhelming 50bps hike this week left it further behind the suddenly steeper inflation curve.

EUR/USD’s fell to fresh 20-year lows after euro zone September composite PMI from S&P global slid to a more contractionary 48.2 from 48.9, while the US composite improved to 49.3 from 44.6.

The data coupled with the hawkish Fed and yield-seeking safe-haven flows propelled the dollar index 1.65% higher to 20-year highs, while EUR/USD tumbled 1.52%.

USD/JPY rallied 0.6%, extending its recovery from Thursday’s dive on Japanese intervention to support the yen, with fears of further forex forays by the MOF likely to slow rather than reverse the dollar’s uptrend in the absence of BoJ tightening.

With another 75bp Fed rate hike almost fully priced in for the November meeting, charts show scope for the dollar index to rise 7% before running into crucial long-term resistance.

At that point, global unease about dollar gains worsening the global inflation and growth outlooks might provide resistance as well.

Highlighting macro risks, 2-year gilt yields surged more than 40bps to 4.005%, its highest since 2008, as sterling hit its lowest since 1985, prompting talk of a new Plaza Accord to weaken the dollar following Japan’s intervention to support the beleaguered yen on Thursday.

The threat of hard landing sent stocks and riskier assets sharply lower, and a the 2-10-year Treasury yield curve inverting a further 10bps to -50.7bps.

Illustrating European concerns was the 15bps widening of 2-year bund-BTP yields spreads ahead of Saturday’s Italian election.

The S&P 500’s slide now threatens June’s 2022 lows, with the DJIA already below its June lows Friday.

Global recession fears crushed commodity prices. Crude fell about 5% to 8-month lows and metals prices, including gold, were down sharply as well. Oil’s drop comes amid Russia’s attempts to annex four regions within Ukraine.

Bitcoin losses kept it close to June’s nadir, while ether still has a bit of room before reaching its summer trough.

Next week’s data calendar is pretty light on top-tier releases until Friday’s inflation updates from the euro zone and US

(Editing by Burton Frierson; Randolph Donney is a Reuters market analyst. The views expressed are his own.)