Asian shares rise, dollar defensive after mild inflation data

Global equity markets, including the MSCI All Country World Index and Japan's Nikkei, reached record highs, while the dollar remained subdued, driven by investor optimism. This sentiment was primarily fueled by milder-than-forecast U.S. inflation data, which solidified expectations for a Federal Reserve interest rate cut in September (94% probability), alongside President Trump's executive order pausing Chinese import levies. The positive momentum was further supported by resilient economic indicators in major economies, leading to broad gains across global shares and risk assets.

Analysis

Global equity markets have surged to record highs, with the MSCI All Country World Index reaching 950.13 and Japan's Nikkei surpassing the 43,000 level, fueled by a powerful combination of dovish monetary policy expectations and easing trade tensions. The primary catalyst is benign U.S. inflation data for July, which came in slightly below forecasts, effectively quelling fears of stagflation and cementing market expectations for a Federal Reserve rate cut. According to the CME FedWatch tool, the implied probability of a September rate reduction has jumped to 94%, a significant increase from 57% a month ago. This sentiment was further bolstered by a U.S. executive order pausing new tariffs on Chinese imports for 90 days. The market reaction has been a broad-based move into risk assets, reflected in a weaker U.S. dollar, which fell 0.2% to 97.80, and strong performance in risk-sensitive assets like ether. The rally has global breadth, supported by positive domestic factors in Japan, including improved manufacturer sentiment and slowing wholesale inflation.

Key Decisions for Investors

• Given the potent combination of easing inflation, a near-certain Fed rate cut, and a temporary trade truce, investors should consider maintaining a pro-risk stance with exposure to global equities.
• The high probability of Fed easing suggests continued downward pressure on the U.S. dollar; positioning for further weakness in the dollar index against major currencies may be a prudent strategy.
• Investors must closely monitor political developments surrounding the Federal Reserve's independence and the integrity of U.S. economic data releases, as these represent key risks that could rapidly reverse the current market optimism.