U.S. Yields, Dollar Tumble as Fed’s Clarida Cautions on Global Growth

(Bloomberg) -- The dollar tumbled with Treasury yields on Friday after Federal Reserve Vice Chairman Richard Clarida said the central bank has to factor in the global growth outlook as it charts policy.

The Bloomberg Dollar Spot Index sank 0.5 percent and two-year Treasury yields dropped to the lowest since October after Clarida told CNBC that the Fed is getting closer to neutral and that there is “some evidence” that the world economy is slowing. His comments follow those of Fed Chairman Jerome Powell, who cited the prospect of cooling global demand in a speech Wednesday.

Officials’ emphasis on global growth will shake the market’s faith in the central bank’s tightening path, according to Canadian Imperial Bank of Commerce. The spread between December 2018 and December 2019 eurodollar futures, which represents the amount of Fed hikes being priced into the market for next year, fell as low as 34 basis points, the lowest in two months. It was above 50 basis points last week.

“The Fed can’t hike in a vacuum, and it’s subtly making that more clear,” said Bipan Rai, CIBC’s head of North American foreign-exchange strategy. “The market is still long the dollar, so profit taking on the back of those comments looks to be driving things.”

Policy makers have raised rates three times this year, and markets are pricing in about an 80 percent chance of a quarter-point hike next month. The dollar has benefited from expectations for higher U.S. rates, gaining about 4 percent this year.

A tame inflation outlook may also support the case for the Fed to scale back its rate-hike trajectory, as Clarida said he doesn’t anticipate a big pickup in price pressures in 2019.

“That clears the way for an expected lower path of real rates,” BMO rates strategist Jon Hill wrote in an email Friday.

--With assistance from Edward Bolingbroke and Emily Barrett.

To contact the reporter on this story: Katherine Greifeld in New York at kgreifeld@bloomberg.net

To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Mark Tannenbaum

©2018 Bloomberg L.P.