Why the US Dollar Index and Treasury Yields Pulled Back

Alicia Cross
September 23, 2017

The Nasdaq Composite fell five points, or 0.08%, to 6,456, with Apple Inc (AAPL.O) as its biggest drag. Benchmark WTI crude fell below $50 per barrel.

Fed officials for weeks have signalled a move to shrink the USA central bank's holdings of Treasuries and mortgage-backed securities. The Fed said it would begin shedding $4.5 trillion in investments next month. Australia's S&P/ASX 200 fell 0.1 percent to 5,709.10. However, the Federal Reserve sounded hawkish at the meeting, that could send this market straight through the roof.

As expected, the Fed on Wednesday set a start date for its effort to reverse the balance-sheet expansion it undertook in response to the 2008 financial crisis, following a step-by-step plan unveiled in June. Traders seemed to be bracing for an on balance dovish message from the Fed, even though the market still expected a rate hike at the end of the year to be more likely than not.

"US growth could well be affected in the short-term by the recent devastating hurricanes, but the labour market continues to prosper and shows no signs of slowing down". Investors, however, awaited details on how the central bank will unwind its United States dollars 4.5 trillion balance sheet.

USA benchmarks were nervously to-ing and fro-ing ahead of the Fed's monetary policy update.

So far this month, the 2-year Treasury yield has climbed more than 10 basis points, the benchmark 10-year note yield has tacked on more than 12 basis points, while the yield on the 30-year bond has advanced about 6 basis points, thus far in September.

Taiwan's TAIEX index rose 0.6% in the wake of HTC's $1.1 billion smartphone deal with Google.

Alnylam Pharma (NASDAQ:ALNY) surged almost 52% after announcing positive results from a phase 3 study, reminding everyone of the lottery ticket nature of development biotech stocks. The drug is used for the treatment of patients with hereditary ATTR amyloidosis with polyneuropathy.

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U.S. benchmarks appeared to be sitting on the fence at the open ahead of the Fed conference later.

The large-cap S&P 500 Index (NYSEARCA:SPY) rose 0.1% to close at 2,508.24, its fourth straight record close.

The TSX in Toronto added over 38 points to stand at 15,331.

Brent crude futures were up 0.3 percent at $55.30 a barrel and USA crude rose 0.6 percent to $49.76 a barrel. Banks benefit from higher rates, which can translate into higher profits from lending money. In her post-announcement press conference, Federal Reserve Board Chair Janet Yellen admitted that the tepid behavior of inflation was puzzling, but maintained a focus on evidence of labor market tightness - something that historically has been a strong antecedent of wage-push inflation pressure.

But Central bankers have a hard juggling act to maintain against inflatioin and economic growth. Such a move by the Fed would likely push long-term interest rates up. But economic growth and low unemployment suggest they should act.

The Fed has felt confident to raise rates because it appears to have met one of its key mandates: Maximizing employment.

Still, the Fed said in a statement that prices for gasoline and other items might temporarily spike because of the damage caused by Hurricanes Harvey, Irma and Maria.

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