Dollar drops to 3 year low, as Shell shuts down BP takeover talk

There is a risk on tone to markets on Thursday, bond yields are lower, stocks are up slightly and oil prices remain stable. Geopolitical fears are receding, and there are rising hopes for chunky rate cuts from the Federal Reserve in the coming months and years.

Shell not interested in BP

The main news in the UK is Shell’s firm rebuttal that it will make any offer for BP. News circulated last night that talks about a purchase were ongoing, however, Shell has put this to bed, for at least 6 months. Shell published a detailed statement denying the recent reports, which triggers section 2.8 of the Takeover Code. For now, any takeover of BP by Shell will be a 2026 story, and is unlikely to happen in 2025.

Interestingly, BP’s share price is higher on Thursday, while Shell’s share price is slightly lower. YTD, BP and Shell are both underperforming the FTSE 100, which is partly down to the weaker oil price. BP’s share price is still underperforming its global peers, and now that Shell is out of the running as a potential buyer, we do not see BP repairing its position in the coming weeks or months.

While the speculation about Shell’s purchase of BP will die down, there is some logic in the oil majors bonding together. The oil price could remain suppressed for some time, as there is ample supply in the market, for both this year and next, according to the IEA. This is a tricky period for the oil majors, and there could be strength in combining reserves.

Dollar drops as rate cut expectations surge

The dollar is in focus on Thursday, after reports suggested that Donald Trump is considering announcing his pick for Jerome Powell’s successor as Fed chair as early as this Autumn, even though Powell’s term as governor does not end until May 2026. This could undermine Powell’s final months as chair. The consensus is that Trump will pick a dovish chair, who is likely to cut interest rates. This triggered a decline in US bond yields, which has weighed on the dollar.

The dollar index fell to a new three-year low, and is extending declines on Thursday.  Trying to call a bottom for the USD seems pointless now, since it is closely linked to fiscal and political developments. The Trump administration said that the Fed should pursue a ‘growth-orientated monetary policy’, which suggests that the White House wants rate cuts as soon as possible.

Is the Fed’s independence at risk?

The interest rate futures market has rushed to price in deeper rate cuts from the Federal Reserve in the aftermath of this report. There are now 2.5 cuts priced in for this year, with a further 2.5 cuts priced in for next year. By the end of 2026, when the new governor of the Fed will be ensconced in their new role, US interest rates are expected to be a mere 3%. This is a level that would no doubt please President Trump, but it may also lead to questions about the Fed’s independence.

If the new chair is announced in the coming weeks, then we could see a shadow Fed emerge, which could undermine Powell’s message of slow and steady rate cuts. The governor-elect could also impact market sentiment, and ultimately their statements could become more important than Fed meetings as we move into the second half of the year. So far, the front runners to replace Powell include Kevin Warsh, Kevin Hassett, Christopher Waller (who called for a rate cut in July), and even Treasury Secretary Scott Bessent.

Why falling yields, and fiscal concerns could weigh on the dollar

The bigger picture suggests that the US dollar is declining in the face of high bond yields, as the US fails to attract capital. However, things could start to shift for US bonds. There has been a large shift lower in yields in recent days, which is weighing heavily on the greenback. Bond yields in the US fell on Wednesday and yields across Europe are also lower. In the last week, the 2-year Treasury yield has fallen more than 18 bps, which is helping to topple the dollar.

The dollar is the second weakest currency in the G10 FX space so far this week. It has made large declines vs the pound, as UK yields are likely to remain higher than their US counterparts for the foreseeable.

Nvidia reaches a fresh record as US stocks are in vogue

US stock market futures are pointing to a higher open later today. Tech stocks are rising sharply, as lower yields boost their attractiveness. Nvidia rose 4% on Wednesday to a fresh record high. It is now the world’s most valuable company, after rallying more than 60% since the April low. Bitcoin is rising in line with US stocks and is also moving towards its record high. This is also supporting Coinbase, which is the top performer on the S&P 500 so far this week.