Euro erases gains as ECB seen moving to cut rate in December

“I’m afraid the big picture is such that we are going to have more problems in the next year or two and being long most stocks or most investments is not going to be great”.

Higher U.S. interest rates compared with European peers reflect growing sentiment that the Federal Reserve will increase boost its benchmark target in December, while the European Central banks considered adding to its monetary stimulus. “Hedge funds are not performing well this year so their risk tolerance is reduced”, said a fixed income executive at USA brokerage in Tokyo.

All this is very important for dollar-based investors as literally nobody knows how much upward potential the US currency has once the Fed will start normalizing. “If you stop doing it, your exchange rate appreciates significantly and you get burnt on the way up if it gets really strong”, he said.

The central bank is eyeing the shift to the corridor system – which would make use of an auction-type scheme to set key interest rates – to better influence market rates and mop up excess liquidity in the local market. The dollar was little changed at 122.63 yen.

It also is advantageous to any Americans traveling overseas.

Copper has applications in most sectors of the global economy that range from homes to factories, to electronics and power generation as well as power transmission, and therefore copper is rightfully considered as a reliable leading indicator of global economic health.

But the strong dollar is not good news for large corporations with a big worldwide presence.

Just look at online travel agency Priceline on Monday.

The USA currency has surged at least 1 percent against each of its major peers this year. Core inflation excluding agricultural and petroleum product prices also rose to 2.3%, from 2.1% in September.

Priceline is the latest multinational to fall victim to the dollar’s strength.

But it’s not the only one.

COMMODITY CRUNCH: A deepening slump in oil, metals and other commodities was putting investors off. Copper prices are down 23 percent this year while crude oil futures fell 2.7 percent on Thursday.

That’s something the Fed is going to have to watch closely before it decides to raise rates.

But United States bond yields dipped on Thursday after James Bullard, the head of the St Louis Fed and a hawkish member of the USA central bank, raised the possibility that industrial nations may be headed into an era of permanently lower rates.

The Fed has been noting that net exports have been “soft” in every statement since June.

For most Fed officials who have commented, average monthly payroll growth of more than 180,000 since August is more than enough for them to be satisfied the job market is tightening at a strong enough pace.

Analysts are now pencilling in a cut in the ECB’s deposit rate from the current -0.20% of 10 or even 15 basis points – a basis point is one hundredth of a percentage point – as well as an extension of its asset-purchase programme.

“These countries don’t want to be the losers in the currency war they think the ECB is participating in”, said Marchel Alexandrovich, senior European economist at Jefferies global Ltd in London.