Wellington - The dollar was the chief beneficiary of the Federal Reserve’s first and only interest-rate hike of 2016, rallying to a 10-month high against the yen after officials signaled a steeper path for borrowing costs. European equities climbed while bonds slumped.
The greenback extended its advance against major and emerging-market peers. Japanese shares rose as the yen fell, while equities in Australia, China and Singapore slid and crude oil pared losses.
Government debt tracked a rout in Treasuries, with UK 10-year gilt yields reaching the highest since May. The rand slumped, as did the Korean won. China’s 10-year government bond yield headed for its biggest one-day increase and the yuan fell the most in a month.
The second US rate increase in a decade tied off a volatile 2016 for markets. The year opened with investors whipsawed by ructions in Chinese trading and Japanese monetary policy, followed by shock election results for Brexit and Donald Trump.
The Fed moving further into tightening territory helps shift the focus away from global central-bank policy and toward fiscal stimulus, with Trump expected to stoke US growth through spending.
After hiking by 25 basis points, US policy makers expect three rate increases in 2017, up from the two seen in September. Still, Fed Chair Janet Yellen sought to downplay the significance of that shift at a presser after the decision.
“The fact that 11 of 17 voting members are calling for at least three rate hikes in 2017 reverberated around trading floors,” said Chris Weston, chief market strategist in Melbourne at IG Ltd. “Keep an eye on China as the strength of the dollar is not going to be welcomed by the Chinese corporates who have to borrow from debt markets to fund much of the recently announced acquisitions.”
The yen fell 0.7% to ¥117.83/$ as of 10:33, extending losses and touching its weakest level since February 4.
The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major peers, was up 0.4% after Wednesday’s 1.1% jump. The euro fell 0.5%. The Fed lifted its target for overnight borrowing costs by 25 basis points on Wednesday to a range of 0.5% to 0.75%.
“This is a very modest adjustment in the path of the federal funds rate,” Yellen said during the press conference. The decision to raise rates is “a vote of confidence in the economy,” she said, noting that some Fed officials, but not all, incorporated the assumption of a change in fiscal policies when making their forecasts.
The won slipped as much as 1.1%, while the onshore yuan was down 0.4% after China’s central bank weakened its fixing by the most since August. The rand tumbled 1.1% while the Turkish lira rebounded 0.2%.
The Stoxx Europe 600 Index advanced 0.4%as German and French equities climbed. Futures on the S&P 500 Index were little changed after the gauge suffered its steepest drop since October on the back of the Fed’s decision.
The MSCI Asia Pacific Index sank 1.7%, the most since November 9, even as the weaker yen’s boost to exporters allowed Japan’s Topix index to climb 0.3%. Australia’s S&P/ASX 200 Index lost 0.8% as energy and mining stocks led declines, while China’s CSI 300 Index slipped 1.1%.
Yields on 10-year Treasury notes rose three basis points to 2.60%, touching their highest level since September 2014.
China’s 10-year sovereign yield surged 22 basis points to 3.45%, set for a record increase on a closing basis, as a plunging yuan and hawkish Fed comments damped expectations of monetary easing in China. Yields on similar maturity Australian debt increased nine basis points to 2.88%. Ten-year Japanese yields climbed three-and-a-half basis points to 0.085%.
West Texas Intermediate crude was up 0.2% at $51.16 a barrel, after Wednesday’s 3.7% slide.
Gold for immediate delivery was down 0.6% to $1 136.66 an ounce, after sliding to its lowest price since February. “The FOMC was upbeat and more hawkish than anticipated,” strategists at Australia & New Zealand Banking said in a note, referring to the rate-setting Federal Open Market Committee. Lead climbed 1.6% in London.