US dollar at lowest since September, global stocks gain

© Reuters. FILE PHOTO: Passersby are reflected on an electric stock quotation board outside a brokerage in Tokyo, Japan April 18, 2023. REUTERS/Issei Kato/File Photo

By Chris Prentice and Wayne Cole

NEW YORK/SYDNEY (Reuters) -The U.S. dollar dropped to its lowest in more than two months on Monday on expectations that U.S. interest rates have peaked, while Wall Street's three major stock indexes closed at multi-month highs.

Global equities were broadly higher, U.S. treasury yields headed lower after auction and global oil futures gained $2 on the prospect of supply cuts.

The MSCI World Equity Index gained 0.71%.

Europe's benchmark STOXX index inched up 0.1%, with energy stocks leading gains. The healthcare sector fell after shares in Bayer (OTC:BAYRY) dropped to their lowest in 14 years.

On Wall Street, the Nasdaq saw its highest close since July 31 while the S&P 500 registered its highest closing level since Aug. 1.

The tech-heavy Nasdaq led gains as shares of Microsoft (NASDAQ:MSFT) hit record highs. The Dow Jones Industrial Average rose 203.76 points, or 0.58%, to 35,151.04, the S&P 500 gained 33.36 points, or 0.74%, to 4,547.38 and the Nasdaq Composite added 159.05 points, or 1.13%, to 14,284.53.

The dollar index fell 0.42% and touched its weakest since the start of September, as investors appeared to solidify bets that the Fed could start cutting interest rates next year.

Japanese shares hit highs not seen since 1990, thanks to strong earnings and offshore demand that fueled a three-week winning streak. The Nikkei ran into profit taking but was still up 8.2% for the month so far with the Topix not far behind.

Trading was expected to be muted for much of the week ahead of Thursday's U.S. Thanksgiving holiday. Black Friday sales will test the pulse of the consumer-driven U.S. economy this week.

"The historical pattern over the last five years suggests the shortened holiday week typically enjoys modest gains," said Quincy Krosby, chief global strategist for LPL Financial (NASDAQ:LPLA).

"With concerns over the resiliency of consumer spending, however, the market can be affected by any indication that Black Friday doesn't witness the throngs of consumers out hunting for bargains, or indications that the start to Cyber Monday won't result in the billions of dollars that are spent online," Krosby added.

Minutes of the Fed's last meeting will offer some color on policy makers' thinking as they held rates steady for a second time.

"Dovish minutes could trigger some downside risk for the dollar," Ricardo Evangelista, senior analyst at ActivTrades, said.

Signs of progress in the battle against inflation in the United States have driven a recovery in stocks this year as investors hope for an end to the cycle of rate hikes that have been policymakers' main tool for fighting price increases on goods.

"We expect the mega-cap tech stocks will continue to outperform given their superior expected sales growth, margins, re-investment ratios, and balance sheet strength," Goldman Sachs analysts said in a note. "But the risk/reward profile is not especially compelling given elevated expectations."

Tech major Nvidia (NASDAQ:NVDA) reports quarterly results on Tuesday, and all eyes will be on the state of demand for its AI-related products.

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Markets have all but priced out the risk of a further U.S. rate hike in December or next year.

Solid bidding in the $16 billion sale of 20-year Treasury bonds indicated expectations remain that inflation will decelerate and the Fed will cut interest rates around June next year. [US/]

There was relief in Europe for some battered sovereign names, as the risk premia investors ask to hold Italian and Portuguese debt fell after ratings agency Moody's (NYSE:MCO) upgraded its view of the two countries.

It upgraded the outlook for Italy from negative to stable, and pushed Portugal's long-term issuer rating up two notches to A3 from Baa2, narrowing the spreads on both bonds relative to the region's benchmark German 10-year bonds.

Closely watched surveys of European manufacturing are due this week. Any hint of weakness will encourage more wagers on early rate cuts from the European Central Bank.

"These surveys will be very important around the euro area services sector given the sharp deterioration seen recently," NAB analysts said.

Markets imply around a 70% chance of an easing as soon as April, even though many ECB officials are still talking of the need to keep policy tight.

Sweden's central bank meets this week and may hike again, given high inflation and the weakness of its currency.

In commodities, oil rose amid speculation OPEC+ will extend, or increase, its production cuts at a meeting on Nov. 26. [O/R]

Brent crude settled up 2.1%, at $82.32 a barrel, as U.S. crude finished at $77.60, up 2.3%.

Gold futures settled down 0.22% at $1,980.30 an ounce.[GOL/]