Wall Street sends stocks higher, dollar lower ahead of Fed news

After stocks rose last week on expectations that the U.S. economy would avoid recession and that slowing inflation would lead to lower interest rates, the dollar fell on Monday.

On Wall Street, stocks extended recent gains. The Dow Jones Industrial Average rose 0.58% to 40,896, the S&P 500 gained 0.97% to 5,608 and the Nasdaq Composite rose 1.39% to 17,876. MSCI’s broadest index of world stocks rose about 1%.

Expectations of lower borrowing costs failed to sustain the historic highs recorded by gold prices, which led to the dollar weakening against the euro while the yen rose in value.

Fed members Mary Daly and Austan Goolsbee hinted at the possibility of monetary easing in September over the weekend, while minutes from the Fed's latest meeting, due out this week, are likely to confirm the dovish outlook.

Federal Reserve Chairman Jerome Powell speaks in Jackson Hole on Friday and investors expect him to bolster the case for a rate cut.

“We expect the chairman to signal on Friday that the Fed will likely begin easing monetary policy next month, but without fully committing to the size of the rate cut,” analysts at TD Securities wrote in a note on Monday.

Interest rate futures are fully priced in for a quarter-point rate cut, meaning there is a 25 percent chance of a 50 basis point cut, with much depending on what the next jobs report shows.

U.S. Treasury yields fell on Monday. The yield on the benchmark 10-year note fell 1.9 basis points to 3.873%, compared with 3.892% late Friday.

Goldman Sachs analysts have cut their forecast for a U.S. recession to a 20% chance and could lower it further if the August jobs report due in September “looks reasonably good,” analysts said in a note on Friday.

European stocks rose about 0.6 percent, hitting a three-week high, while the FTSE 100 index of leading shares rose 0.55 percent.

Investors are awaiting the release of purchasing managers' indices (PMIs) for the UK, France, Germany and the eurozone later this week.

Earlier, the Nikkei 225 index closed down 1.77% at 37,388.62, snapping a five-day winning streak that saw it rise 8.7% over the past week. China's blue chips closed up about 0.3%.

The fall of the dollar

In currency markets, the dollar fell to a seven-month low and the Japanese yen hit its highest in more than a week as traders awaited the Federal Reserve’s decision on whether to cut interest rates. The dollar fell 0.64 percent to 146.64 yen, while the euro extended its August rally with a 0.5 percent gain to $1.108.

Henry Allen, macro strategist at Deutsche Bank, said that although markets have calmed down, it is important to remember that the economic fundamentals that sparked the sell-off in global markets two weeks ago have not completely disappeared.

“Economic data is increasingly weaker globally, lower inflation means monetary policy is becoming tighter in real terms, geopolitical concerns are rising and we are heading into a tough seasonal period,” Allen said in a note.

A weaker dollar and lower bond yields failed to keep gold prices at their peak and they fell to around $2,505 an ounce, just below their all-time high of $2,509.

Oil prices fell as concerns over Chinese demand continued to weigh on sentiment.

U.S. crude fell 2.9% to $74.42 a barrel, and Brent crude fell to $77.79 a barrel, down 2.37% on the day.