NEW YORK: Stocks in Europe and Asia rose slightly and the dollar edged higher on Monday as investors considered the prospect of a U.S. interest rate rise in the coming months.
The moves came on a quiet day of trading, with stocks markets in the U.S. and U.K. closed for holidays.
The timing of the Fed’s next rate increase has been a key consideration for investors this year. Fed officials scaling back plans to raise rates by a percentage point in 2016 helped spur a rally in riskier assets and a decline in the dollar earlier this year.
Now, investors are looking to see whether the Fed believes the U.S. economy is strong enough to withstand a rate increase after several Fed officials have said recently a rise could soon be appropriate.
“Markets are now trying to recalibrate as the Federal Reserve goes back on the front foot in terms of” raising interest rates, said David Page, a senior economist at Axa Investment Managers, who said his central scenario is for a July hike.
“As growth rebounds, markets are a little bit more confident about the outlook,” Mr. Page said.
The WSJ Dollar Index, which measures the U.S. currency against 16 others, was 0.1% higher late in the European afternoon, as the greenback rose 0.8% against the Japanese yen to its strongest level in over a month.
A weaker yen provided a boost to Japanese exporters, helping to lift the Nikkei Stock Average 1.4%. Shares elsewhere in Asia mostly inched higher.
Brent crude prices recovered from earlier losses to trade up 0.5% at $50.20 a barrel late in European trading, near the highest level since November following disruptions to supply. Investors are awaiting the Organization of the Petroleum Exporting Countries meeting Thursday, where the issue of oversupply is likely to be discussed but an agreement on output looks unlikely.
The prospect of higher U.S. interest rates dented gold prices, which were down 0.6% at $1,209.40 an ounce.
The Stoxx Europe 600 ended up 0.1% in its fifth consecutive session of gains, led higher by a 0.5% gain in Germany’s DAX index and a 1.1% rise in European auto shares.
Yves Maillot, head of the equity investment division at Natixis Asset Management, said equity markets are likely to drift sideways or head lower in the coming weeks.
“We have more reasons to be cautious, especially because the market has recovered” from a selloff at the start of the year, he said.
Mr. Maillot said the forthcoming U.K. referendum on its membership of the European Union, along with the Fed’s June and July meetings, means investors are facing a good deal of uncertainty.
“It is difficult to stay positive on the market due to this uncertainty,” he said, adding he prefers to adopt a neutral position on stocks currently.
The S&P 500 ended Friday at its highest closing level since April 20 after data showed that the U.S. economy’s slowdown wasn’t as bad as initially thought and Fed Chairwoman Janet Yellen echoed comments from other Fed officials that another rate rise could soon be in the cards.
A rate increase would be appropriate “probably in the coming months” if the economy and labor market continue to strengthen, Ms. Yellen said during a panel discussion at Harvard University Friday.
Federal Reserve Bank of St. Louis President James Bullard, meanwhile, told a news conference in Seoul Monday that he would like to digest more data before making a decision on raising rates in June or July.
Fed fund futures, which traders use to bet on interest rates, suggest there is now a 28% probability of the Fed raising rates in June, up from 4% earlier this month, according to CME Group. Futures indicate a 61% chance of a rate move by the end of the Fed’s July meeting.
A Fed rate increase would reverberate throughout global financial markets.
Higher interest rates tend to boost the appeal of dollar-denominated assets, providing a leg-up for the greenback.
That makes commodities priced in dollars, such as crude oil, more expensive for foreign buyers and can weigh on prices.
Raising interest rates also tends to hurt gold because it makes yield-bearing assets more attractive. Gold is down over 3% from a week ago, near its lowest level since February.
A stronger dollar matters for countries’ whose currencies are pegged to the buck. China’s central bank set the daily yuan-fixing at its weakest level against the dollar in more than five years on Monday. The country’s Shanghai Composite Index, meanwhile, eked out a 0.1% gain.
While a strong dollar may eat into the profits of U.S. companies that sell their goods abroad, non-U. S. exporters should benefit from their own currencies weakening.
Monday’s gain in Japanese shares on the back of the weaker yen came despite data showing a fall in Japanese retail sales.
Elsewhere in currencies, the euro gained 0.2% against the dollar Monday to $1.113 after data released showed French economic growth accelerated faster than initially estimated in the first quarter.
In bond markets, the yield on 10-year German government bonds rose 0.03 percentage point to 0.17%. Yields rise as prices fall.