Dollar, bond yields advance on Federal Reserve interest-rate hike
NEW YORK (Reuters) – The dollar hit a 14-year high and government bond yields rose broadly on Thursday, extending gains from a day earlier when the Federal Reserve hiked US interest rates and signaled increases would follow at a faster pace next year.
US stocks bounced back from their biggest daily percentage decline in about two months, led by gains in financial shares. The Dow Jones Industrial Average again neared the 20,000 mark.
The Fed’s rate rise of 25 basis points to 0.5%-0.75% was well flagged, but investors were spooked when the “dot plots” of members’ projections showed a median of three hikes next year, up from two previously.
Fed fund futures slid to imply an almost 50% chance that the Fed would raise rates three times, with two hikes fully priced in already.
The central bank’s decision to raise rates comes as US President-elect Donald Trump, who will be sworn in next month, is expected to cut taxes and boost spending on infrastructure.
“While there still remains a cloud of uncertainty over how economic policy may change under Trump’s presidency, the same rising optimism towards Trump boosting US growth through tax cuts and infrastructure spending may have played a key part in the changes to the Fed’s projections,” FXTM research analyst Lukman Otunuga said.
The dollar index, which measures the greenback against a basket of six major rivals, was last up about 1.7% to 103.54, a 14-year high.
Bank shares helped lift stock indexes on the prospect of a boost to their profits.
The Dow Jones Industrial Average was up 142.06 points, or 0.72%, to 19,934.59 in afternoon trading, the S&P 500 gained 15.79 points, or 0.700756%, to 2,269.07, and the Nasdaq Composite added 43.39 points, or 0.8%, to 5,480.07.
European shares, up 1%, also rose with bank stocks, while MSCI’s all-country world stock index was down 0.5%.
Bond markets saw yields on short-term US debt surge to multiyear highs.
The belly of the US yield curve also climbed to multiyear peaks, with US five-year notes rising to their strongest level in five and a half years and seven-year notes hitting almost three-year highs. Yields on US two-year notes touched more than seven-year peaks.
Benchmark 10-year Treasury prices were down 12/32, yielding 2.567%, up 4 basis points from levels late on Wednesday.
Emerging-market stocks fell 1.8%. The Fed’s anticipated policy path, and expectations that Trump will get growth motoring, are keeping emerging markets on edge as capital gets sucked from more fragile, export-dependent economies toward dollar-based assets.
The allure of higher US yields raises risks for emerging markets, as funds look to take advantage of rising US rates rather than put their money in traditionally riskier economies.
Among commodities, gold hit its lowest since early February, while oil prices fell as the dollar rallied.