Soaring stock markets will drive FX trends further
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July 5 (Reuters) -Currencies are being heavily influenced by world stocks that have reached a record high this month and will be further supported if U.S. interest rates begin to drop in September as expected.
The injection of stimulus that a U.S. easing cycle provides will influence stocks that are climbing toward, or through hugely significant levels, that if broken convincingly, should result in much bigger rises.
Despite slipping marginally since breaching 40,000 in May the Dow Jones Index is on course to rise further on the heels of the Nasdaq which has climbed over 20,000 this month, and the S&P 500 which has already gained 10% in value since breaking 5,000 in the middle of June.
The epic rises for stocks - that have unfolded while U.S. interest rates remain restrictive - are about to be fuelled by a series of interest rate cuts that will probably see the U.S. benchmark drop to 4% by the end of 2025.
In an environment that supports risk, stocks could rise much further, and the currency trends influenced by equities that have supported the dollar and carry trades are likely to endure.
As the highest-yielding major currency, the dollar which is also the safest currency, should continue to prosper even if U.S. interest rates drop. The level of the U.S. benchmark will remain the pivot for other carry trades with currencies of nations that hold rates below those in the U.S. falling further, while free-floating and higher-yielding currencies, such as Mexico's peso draw more adventurous investors.
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(Jeremy Boulton is a Reuters market analyst. The views expressed are his own)
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