The U.S. dollar gained on the yen in Asia on Monday as investors unwound safe-haven trades in the wake of the failed coup in Turkey, while better U.S. economic news and the promise of central bank stimulus lent support to equities.
The Turkish lira and other emerging-markets currencies plunged while haven assets such as gold and the yen shot higher Friday, after Turkey’s prime minister said there was a coup attempt under way.
The U.S. dollar jumped 4.8% against the Turkish lira to trade at 3.0149. Other emerging market currencies followed suit: the dollar was recently up 1.4% against the Mexican peso to 18.60, while rising 2.5% against the South African rand to14.57 and 1.3% against the Russian ruble, to 63.70.
Turkey’s prime minister said Friday night that segments of the military were trying to carry out a coup as troops closed off major bridges in Istanbul, tanks took up positions at the city airport and jets flew low over the capital.
Prime Minister Binali Yildirim appeared on live television to say that members of the military had tried to overthrow the government and that they would pay a heavy price. The Turkish military, meanwhile, said that it had seized control of the government as tanks took up positions outside Istanbul’s airport
Investors also piled into the yen, a popular safe haven during rocky markets. The dollar was recently down 0.4% at ¥104.94, reversing earlier gains.
U.S. retail sales rose more than expected in June as Americans bought motor vehicles and a variety of other goods, bolstering views that economic growth picked up in the second quarter.
Those expectations were further reinforced by other data on Friday showing that industrial production recorded its biggest increase in 11 months in June, driven by a surge in motor vehicle assembly. With domestic demand strengthening, inflation is also steadily rising.
The bullish data and a rally on Wall Street could allow the Federal Reserve to raise interest rates later this year, but much will depend on policymakers' assessment of the impact on the U.S. economy of Britain's June 23 vote to leave the European Union.
"In normal times, this would be enough for the Fed to continue raising interest rates," said Harm Bandholz, chief U.S. economist at UniCredit Research in New York. "But Fed officials want to wait and see if and how Brexit affects the outlook for the U.S. economy before pulling the trigger again."
The Commerce Department said retail sales rose 0.6 percent last month after gaining 0.2 percent in May. It was the third straight month of increases and lifted sales 2.7 percent from a year ago.
Friday's reports helped to offset disappointing financial results from big U.S. banks, hoisting Wall Street to fresh highs. The dollar rose versus a basket of currencies, while prices for U.S. government debt fell.
The strong domestic demand is gradually translating to higher consumer prices. In a third report, the Labor Department said its Consumer Price Index rose 0.2 percent last month after a similar gain in May. The so-called core CPI, which strips out food and energy costs, also rose 0.2 percent in June, increasing by the same margin for three consecutive months.
A fourth report showed consumer sentiment fell in early July as high-income households worried about the impact of Brexit on stock prices. Share prices have, however, since rebounded and are trading at record highs.
"Looking ahead to the second half, further stability in commodity prices and fading import price deflation should continue to show up in the form of firmer prices for consumer goods," said Sam Bullard, a senior economist at Wells Fargo Securities in Charlotte, North Carolina.
The New York Federal Reserve said on Friday it upgraded its view on U.S. economic growth in the third quarter to 2.61 percent from the 2.31 percent it calculated a week ago due to stronger-than-expected data on factory output in June.
The regional central bank said it "nowcast" model also raised its forecast on U.S. gross domestic product in the second quarter to 2.18 percent from last week's estimate of 2.09 percent.
What was the bottom line of the 14 Federal Reserve speeches this week?
Fed experts said that the central bankers kept the flame alive for a possible interest-rate hike at the end of the year but want to wait until then to assess the impact of the Brexit referendum on the U.S. economy.
“They’re buying the option to raise rates this year if the data unfold the way they anticipate,” said Joe LaVorgna, chief U.S. economist at Deutsche Bank.
“Their hope and intention is to raise rates. Two seems difficult, one is feasible,” LaVorgna said.
In the wake of the strong June jobs report from last Friday, investors are now pricing in a 40% chance of a rate hike in December, according to the CME’s Fed Watch tool. This is up from only 12% before the report.
The Fed policy meeting has four meetings remaining this year: July 26-27, Sept. 20-21, Nov. 1-2 and Dec. 13-14. Fed Chairwoman Janet Yellen is scheduled to hold news conferences in September and December.
Analysts see no probability of a Fed rate hike at the meeting in 11 days. Only a quarter of economists see a rate hike in September, according to a recent poll by The Wall Street Journal. And a November move is seen as unlikely as the meeting is six days before the presidential election.
“Our call is still super-gradual, one move at the end of the year,” said Sal Guatieri, a senior economist at BMO Capital Markets.
St. Louis Fed President James Bullard said on Friday there are "upside" risks to his view that the U.S. central bank should raise interest rates just once this year and remain on hold in 2017 and 2018.
In a presentation to the Official Monetary and Financial Institutions Forum, Bullard said his baseline is for the U.S. economy to continue to grow slowly at just 2 percent a year, unemployment to be around 4.7 percent and inflation to be at the Fed's 2 percent target.
Given that forecast, he said, the economy will need a federal funds rate of between 0.5 percent and 0.75 percent for the foreseeable future. He added that rates would need to go higher if growth speeds up.
Federal Reserve policymakers are "debating internally" over the causes of an apparent downshift in potential U.S. growth, a top Fed policymaker said on Friday, adding that his own view is that it is because of a drop in productivity.
"I am more sympathetic to Robert Gordon than I am to Larry Summers," Minneapolis Fed President Neel Kashkari told reporters on the sidelines of a conference in St. Louis, referring to two university professors who have offered competing explanations for why the U.S. economy appears to be stuck in a period of slow growth. "We are debating a lot of this internally, about which of these is a better explanation for what we are seeing."
Oil prices rose slightly on Friday, ending the week higher, after data from top energy consumers the United States and China boosted the oil demand outlook.
Crude prices touched session highs after data showed U.S. retail sales rose more than expected in June as Americans bought motor vehicles and a variety of other goods, reinforcing views of steady economic growth in the second quarter. Consumer prices also rose for a fourth straight month.
China's economic growth, which came in at 6.7 percent in the second quarter versus a year ago, also bolstered the market.
"Macro numbers from China and the U.S., the world's largest economies and biggest consumers of oil, have been improving in recent months and if the trend continues in the coming weeks then this should help to boost oil's demand prospects," said Fawad Razaqzada, technical analyst for Forex.com.
Oil prices were either side of unchanged on Sunday in early trade as the impact from Turkey's failed military coup was broadly expected to be limited on global markets.
Reference: Reuters, Wall Street Journal, MarketWatch
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