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Conviction in the strength of the economic recovery pushed investors into technology stocks on Thursday, driving the Nasdaq higher and igniting a 7.1% jump in shares of Canada’s tech superstar Shopify. But the TSX ended lower amid heavy losses in both the energy and materials sectors, which fell in reaction to a sharp rise in the U.S. dollar and the resulting dampening effect on commodity demand.

The Dow slipped to a fourth straight closing loss, with investors still processing the Federal Reserve’s unexpectedly hawkish message on monetary policy from the previous day, which projected the first post-pandemic interest rate hikes in 2023.

Fed officials cited an improved economic outlook as the U.S. economy recovers quickly from the pandemic, with overall growth expected to hit 7% this year. While careful not to derail the recovery - with no end in sight for supportive policy measures such as bond-buying - the rate-rise signal highlighted concerns about inflation.

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“I think there was a scenario that people had in mind, that the Fed was going to allow for a larger and longer inflation overshoot, and I think with the increase in the dot plot yesterday... people are rethinking that scenario,” said David Lefkowitz, head of equities for the Americas at UBS Global Wealth Management.

Technology shares, which generally perform better when interest rates are low, powered a rally on Wall Street last year as investors flocked to stocks seen as relatively safe during times of economic turmoil.

As markets processed the Fed news, investors returned to such positions.

But a slide in commodity prices persuaded investors to stay out of resource sectors.

The S&P/TSX Composite Index lost 86.92 points, or 0.43%, at 20,144.04. The tech sector was the clear winner of the session, gaining 3.58%. Energy stocks lost 4.41% and materials 3.93%.

Unofficially, the Dow Jones Industrial Average fell 209.96 points, or 0.62%, to 33,823.71, the S&P 500 lost 1.76 points, or 0.04%, to 4,221.94 and the Nasdaq Composite added 121.67 points, or 0.87%, to 14,161.35.

The hawkish shift from the Federal Reserve has woken up the slumbering greenback, sending the U.S. currency to its highest level in months and stoking expectations that an unwind of bearish positions could fuel more gains.

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The dollar was on track for its biggest two-day percentage increase against a basket of major currencies in 15 months on Thursday and stands at its highest level since mid-April, a day after the central bank shifted its first projected rate increase into 2023 in the face of surging inflation.

Betting against the dollar has been a popular trade for months, as the Fed’s insistence that it would maintain its ultra-dovish stance despite rising inflation drove the currency to a near 3-year low earlier this year.

The slightly hawkish shift in Wednesday’s statement appears to be changing that calculus: the prospect of a sooner-than-expected rise in U.S. rates boosts the dollar’s attractiveness to yield-seeking investors over currencies such as the euro and yen. Both Goldman Sachs and Deutsche Bank, for instance, after the Fed meeting recommended investors cut their bets on the euro rising against the buck.

“I think FX markets have finally awoken to the idea of earlier normalization from the Fed,” said Simon Harvey, senior FX market analyst at Monex Europe.

Large bets against the U.S. currency may accelerate the recent move if the threat of more gains pushes investors to reverse their bearish positions. Net bets against the dollar in futures markets stood at nearly $18 billion last week, a three-month high, according to data from the CFTC.

“In the coming weeks and months, the short-dollar thesis that has been so dominant and popular for much of the past year will be severely tested,” said Stephen Jen, portfolio manager at hedge fund Eurizon SLJ.

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The dollar index, which tracks the greenback against six major currencies, was up 0.53% at 91.892, its highest since mid April. On Wednesday, the dollar surged nearly 1%, its largest daily percentage gain since March 2020.

Crude oil prices fell nearly 2% from their highest level in years as the U.S. dollar strengthened. Oil demand worries resurfaced after new coronavirus cases jumped in Britain, while supply concerns over the return of Iranian barrels also weighed on the market.

Traders, however, said Friday’s presidential elections in Iran could scuttle nuclear talks between Washington and Tehran and leave U.S. sanction on Iran’s oil exports in place.

Brent futures fell $1.31, or 1.8%, to settle at US$73.08 a barrel, while U.S. West Texas Intermediate (WTI) crude fell $1.11, or 1.5%, to settle at $71.04.

On Wednesday, Brent settled at its highest since April 2019 and WTI at its highest since October 2018. Even though Thursday’s declines were the biggest daily percentage drops since May, both benchmarks were still up over 40% so far this year.

A firmer greenback makes oil and other commodities more expensive in other currencies, which could dent demand.

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Britain reported its biggest daily rise in new cases of COVID-19 since Feb. 19 on Thursday, according to government figures which showed 11,007 new infections, up from 9,055 the day before.

“This UK surge in COVID cases despite rapid vaccinations will raise many alarms over how quickly the rest of Europe will reopen,” said Edward Moya, senior market analyst at OANDA, noting “crude could be ripe for further profit-taking if more optimistic comments come from the latest round of Iran nuclear talks.”

Indirect talks between Tehran and Washington on reviving the 2015 Iran nuclear deal have come closer than ever to an agreement, but essential issues remain to be negotiated, the top Iranian negotiator said on Thursday.

Iran is heading to presidential polls on Friday, with hardline judiciary chief Ebrahim Raisi among the front runners.

“It is very possible that nuclear talks could fall apart if a deal is not done by August (when) the current reform president Hassan Rouhani will leave the government,” said Bob Yawger, director of energy futures at Mizuho in New York.

Washington has sanctioned Raisi for alleged involvement in executions of political prisoners. His election would make it tougher for the United States and Iran to come to an agreement on Iran’s uranium enrichment that would allow U.S. sanctions on Iran’s oil exports to be lifted.

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Analysts have said Iran could boost oil supplies by 1 million to 2 million barrels per day (bpd) if sanctions are lifted.

U.S. gold futures settled down 4.7% at $1,774.80, pulled lower by the rallying U.S. dollar. The July copper contract was down 20.7 cents at nearly US$4.18 a pound.

More to come

Read more: Stocks that saw action on Thursday - and why

Reuters, Globe staff

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