US dollar strength hits shares, oil overnight

Specialist Michael Pistillo, foreground, work with traders at his post on the floor of the New York Stock Exchange. File photo / AP

Wall Street dropped overnight as the US dollar continued to strengthen amid bets the US Federal Reserve will raise interest rates soon.

The greenback reached US$1.0697 per euro, the strongest level since April 2003, with the currency's strength weighing on the outlook for corporate profits.

"There's some concern about what impact this will have on corporate earnings going forward, especially for the big multi-national companies," Nicholas Colas, chief market strategist at the ConvergEx Group in New York, told Reuters.

In afternoon trading on Wall Street, the Dow Jones Industrial Average sank 1.42 per cent, the Standard & Poor's 500 Index slid 1.33 per cent, while the Nasdaq Composite Index declined 1.38 per cent.

Declines in shares of United Technologies and those of Intel, both down 2.4 per cent recently, led the Dow lower.

The Federal Open Market Committee starts its next two-day meeting on March 17. Fed Chair Janet Yellen flagged last month that the central bank would wait at least two meetings before lifting rates.

"We don't think the Fed has made up its mind yet," Kristina Hooper, head of portfolio strategies at Allianz Global Investors in New York, told Reuters. "We worried for a long time that the market was too lackadaisical so in a lot of ways this jobs report is a good thing in that it's aligning expectations with what we think the Fed is likely to do."

The latest US government jobs report was released last Friday in Washington.

There might be more weakness ahead, with the S&P 500 facing a decline of up to 9 per cent, Deutsche Bank chief US equity strategist David Bianco wrote in a note to clients, Bloomberg reported.

"Strong job growth and falling unemployment, despite still-slow GDP, suggest that Fed hikes are on the horizon and likely strengthen the dollar further," according to Bianco. "We see risk of a near-term 5 to 9 per cent dip."

Energy stocks dropped with the price of oil. US West Texas Intermediate crude fell almost 3 per cent. Shares of ConocoPhilips slid 1.2 per cent, as did Occidental Petroleum.

"The dollar's might is creating unexpected headwinds for oil," Tariq Zahir, managing member at Tyche Capital Advisors in Laurel Hollow in New York, told Reuters. "Brent particularly is taking it harder than [West Texas Intermediate] as people unwind and take profit in the spread between the two."

In Europe, a drop in energy stocks including Royal Dutch Shell and BP weighed on the Stoxx 600 Index, which ended the session with an 0.9 per cent decline from the previous close. The UK's FTSE 100 Index shed 2.5 per cent, while France's CAC 40 Index dropped 1.1 per cent, and Germany's DAX fell 0.7 per cent.

The European Central Bank's quantitative easing program, which started on Monday, pushed German bonds higher, driving yields on the country's benchmark 10-year note eight basis points lower to 0.23 per cent.

The decline in euro-zone yields, in turn, helped make US Treasuries more attractive. Yields on the benchmark 10-year Treasury note slid six basis points to 2.13 per cent.

"It's what's going on in Europe that's driving our yields lower," Donald Ellenberger, who oversees about US$10 billion as head of multi-sector strategies at Federated Investors in Pittsburgh, told Bloomberg. "A stronger dollar means less inflation pressure here in the US, and it's certainly good for the Treasury market."