Dollar crunched, bonds boosted as Fed goes gradual

SYDNEY - The dollar nursed bitter losses in Asia on Thursday while sovereign bonds savored their biggest rally in nine months after the Federal Reserve hiked interest rates, as expected, but signaled no pick-up in the pace of tightening.

The euro got an added bonus when early returns showed the anti-EU party of Geert Wilders won fewer seats than expected in Dutch elections, soothing fears that public opinion was swinging inexorably toward a break-up of the union.

The sigh of relief was heard across Asia as investors had feared faster US hikes and more political upheaval in Europe could spook funds out of emerging markets.

"The Fed makes the world safe for risk until June," said CitiFX strategist Steven Englander. "Buy emerging market FX, equities, commodities."

Somebody seemed to be listening as gold, copper and oil all rallied as the dollar dropped. MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.9 percent to its highest since mid-2015.

South Korea's market climbed 1.0 percent but Japan's Nikkei went the other way, easing 0.4 percent, as a jump in the yen pressured exporters.

The Dow had ended Wednesday with gains of 0.54 percent, while the S&P 500 added 0.84 percent and the Nasdaq 0.74 percent.

The Fed lifted its funds rate by 25 basis points to a range of 0.75 percent to 1.00 percent, but said further increases would only be "gradual."

Crucially, officials stuck to their outlook for two more hikes this year and three more in 2018, when many had expected an accelerated spate of moves.

Rather, the Fed said its inflation target was "symmetric," indicating that after a decade of below-target inflation it could tolerate a quicker pace of price rises.

That was painful news for bond bears who had built up huge short positions in Treasuries in anticipation of a hawkish Fed.

DOLLAR DOLDRUMS

Yields on two-year notes were down at 1.30 percent, having fallen 8 basis points overnight in the biggest daily rally since June last year. They had been at their highest since June 2009.

The drop pulled the rug out from the dollar, which sank to a three-week low of 100.510 against a basket of currencies.

The euro was taking in the view at $1.0737, having climbed 1.2 percent overnight in its steepest rise since June. The dollar suffered similar losses on the yen to huddle at 113.34.

Richard Franulovich, a forex analyst at Westpac, noted history showed a strong positive correlation between the dollar and yields one week after a Fed meeting and the direction and magnitude of the change in the dots from meeting to meeting.

"The absence of any overt hawkish guidance from the Fed and their dots should leave the dollar trading on the back foot over the next month," he said.

The yen and the Swiss franc tended to move the most in the first week, he added, but the impact tended to be longer lasting on the Australian and Canadian dollars.

Indeed, the Aussie currency rose a rousing 2 percent on Wednesday to stand at $0.7710.

A protracted bout of weakness for the U.S. dollar would be seen as positive for commodities priced in the currency.

Spot gold was up at $1,221.38 an ounce, after enjoying its biggest daily jump since September.

US crude futures rose 25 cents to $49.11 per barrel, adding to a 2.4 percent gain on Wednesday. Brent gained 32 cents to $52.13, after rising more than a dollar overnight.

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Strong US dollar could challenge Trump agenda

NEW YORK - The strong US dollar, boosted further by the Federal Reserve's decision to raise interest rates, could pose challenges to President-elect Donald Trump's economic agenda.

The greenback shot to fresh multi-year highs against the euro and other currencies Thursday following the Fed's move Wednesday to increase the benchmark lending rate and its signal about additional rate increases in 2017.

The US currency already had been on an upward trajectory after Trump's election, amid expectations he will push policies that could unleash higher growth and inflation, leading to more interest rate hikes.

Many analysts expect the dollar to continue to rise, after gaining five percent against a basket of six currencies since Trump's election.

"We would expect the dollar to continue to strengthen," said Wells Fargo analyst Eric Viloria. The Fed's plans to raise rates further contrasts with "what a lot of other major central banks are doing."

Trump himself has warned of the negative effects of a strong dollar, saying during the campaign that "it sounds better to have a strong dollar than it actually is."

"If we raise interest rates and the dollar gets too strong, we're going to have some major problems," Trump told CNBC in May.

Investors flock to markets that have higher interest rates seeking better returns, which creates more demand for dollars.

PROS AND CONS

A strong currency has traditionally been seen as a sign of economic might among nations. But beyond that, there are some economic benefits. Consumers get better prices on everything from imported clothing and toys to luxury cars, keeping inflation low.

But while the US remains a strongly consumer-oriented economy, data show exports are becoming more important to the economy.

Exports of goods and services as a percentage of US gross domestic product rose to 12.6 percent in 2015 from 9.1 percent in 2002, according to the World Bank.

"The US has been exporting more and more," said economist Joe Naroff. "There is greater sensitivity of the economy to the strong dollar now than it was five or 10 years ago."

A wide swathe of the US economy now depends on exports, including farmers in the midwest, steel companies in Ohio and chemical companies in the Gulf Coast.

All of these sectors already were suffering from the strong dollar, according to Federal Reserve's "beige book" report on economic conditions released in November. Although it also noted that manufacturers can import raw materials at lower prices.

Trump has vowed an "America First" approach to economic policy, pressuring companies to build and keep factories in the US. Yet a strong dollar will add to the price of US exports, making it harder for them to compete in other markets.

MULTINATIONALS GET HIT

US stocks also have risen sharply since the election on optimism Trump will cut taxes, streamline regulations and boost public works spending, which would lead to higher corporate profits.

Yet, a strong dollar hits multinationals not only by making their goods more costly overseas but by forcing them to convert overseas earnings into dollars at a disadvantageous rate.

Some of these negative impacts will be offset by other Trump pledges, such as a cut in corporate taxes.

But "tax reform tends to take a long time," said Aidan Garrib, global macro strategist at Pavilion Financial.

And Garrib predicted the strong dollar would hit US companies even more than in 2014, because the greenback is even higher now.

"For sure, the strong dollar will hurt," he said.

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US bond yields, dollar gain, stocks fall after Fed hike

NEW York - Yields on shorter-dated Treasuries hit their highest levels in more than five years on Wednesday while the dollar rose to its highest against the yen in 10 months after the US Federal Reserve raised interest rates and signaled a faster pace of hikes in 2017.

Wall Street stocks ended a volatile session with their biggest percentage decline since before the Nov. 8 US presidential election, while gold prices hit a 10-month low.

As expected, the Fed raised the target federal funds rate 25 basis points to between 0.50 percent and 0.75 percent. It was its first rate hike in a year and its second since the financial crisis.

Central bank policymakers also shifted their outlook to one of slightly faster growth, with President-elect Donald Trump planning a simultaneous round of tax cuts and increased spending on infrastructure. The Fed now sees three rate hikes in 2017 instead of the two foreseen in September.

"It was largely as expected, but it's pretty clear the market is taking it as a bit more aggressive or hawkish than it had thought," said Ed Keon, portfolio manager and managing director at QMA, a multi-asset manager wholly owned by Prudential Financial in Newark.

Yields on two-year Treasury notes rose to their highest level since August 2009, while three-year yields hit their highest since May 2010 and five-year yields rose to their highest since May 2011.

US two-year Treasury notes were last down 4/32 in price to yield 1.238 percent, an increase of more than 8 basis points from its late Tuesday levels.

The dollar rallied about 1.3 percent against the yen to 116.71 yen, its highest since Feb. 8, while the dollar index , which measures the greenback against a basket of six major currencies, hit a nearly three-week high of 101.960 and was last up 0.8 percent at 101.86.

The dollar and bond yields were mostly trading lower before the Fed statement.

The Dow Jones industrial average fell 118.68 points, or 0.6 percent, to 19,792.53, while the S&P 500 lost 18.44 points, or 0.81 percent, to 2,253.28, its biggest daily percentage drop since Oct. 11.

The Nasdaq Composite dropped 27.16 points, or 0.5 percent, to 5,436.67.

US stocks traded both sides of unchanged just after the statement but began adding to losses during Fed Chair Janet Yellen's subequent news conference.

With US stocks, "we've had a great run, so it's tempting maybe to take a little bit off the table," Keon said. Stocks have rallied since the election on bets of higher US economic growth.

The S&P utilities index, which tends to fall as bond yields rise, fell 2 percent and led losses in the S&P 500, along with the energy index, which fell 2.1 percent.

MSCI's all-country world stock index was down 0.6 percent. The pan-European STOXX 600 share index ended down 0.5 percent.

"All elements we've received so far from the Fed, including the policy statement, the forecasts, the dot plot, tilt hawkish. They imply that the Fed sees more room to run with interest rates higher given the Trump election," said Frances Donald, senior economist at Manulife Asset Management in Boston.

In contrast to the Fed, the European Central Bank only last week extended its asset-buying campaign and moved to purchase more short-term debt.

GOLD, OIL LOWER

Gold turned lower and tapped the lowest in more than 10 months following the Fed statement, while oil prices fell with the dollar's gain.

Spot gold was down 0.3 percent at $1,154.62 an ounce.

Brent crude futures settled at $53.90 per barrel, down $1.82, or 3.27 percent. US crude ended the session down $1.94, or 3.66 percent at $51.04 per barrel.

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Fed set to hike rates, policy outlook now hinges on Trump presidency

WASHINGTON - The Federal Reserve will conclude its two-day policy meeting on Wednesday afternoon with an interest rate increase all but assured and will issue new forecasts assessing whether the economic outlook has changed since the U.S. election.

The latest policy statement and projections are to be released at 2 p.m. EST (1900 GMT) with a press conference by Fed Chair Janet Yellen following at 2:30 p.m.

Markets are poised for the federal funds rate to rise to a target range of between 0.5 and 0.75 percent from the current range of 0.25-0.5 percent, where they have rested since the Fed approved its last rate increase a year ago.

Of more significance is the backdrop of the meeting. After years of the Fed fretting about low interest rates and weak inflation, the weeks since Donald Trump's victory have seen both bond yields and inflation expectations start to rise. The Dow Jones industrial average is up more than 11 percent since the vote.

Details of policymakers' new economic assessments, the first since the election, will be dissected closely to see if policymakers yet feel the arrival of the Trump administration has shifted the economic outlook or poses a risk of greater inflation. The president-elect has said he wants a major tax cut and infrastructure spending program, even as the economy approaches full employment and wages are rising.

"Inflation risks are more significant than they were three months ago," when the policymakers issued their last forecasts, sad Northern Trust chief economist Carl Tannenbaum. "Rates could well rise more than anticipated."

Despite the changed circumstances, it is not certain the Fed will budge on its assessments. The median forecast of policymakers as of September was for two interest rate increases in 2017, an outlook Tannenbaum and many analysts feel may remain the case.

Trump has not yet taken office, and any proposals would have to clear a Republican-controlled Congress that may be stricter about increasing public debt than Trump. In recent public appearances some Fed officials have said they see a chance Trump's policies may force them to speed the pace of rate increases, yet also said they are hesitant to change their outlook before he shares more details.

"Investors who are looking for clarity may be disappointed," said David Donabedian, chief investment officer of Atlantic Trust Private Wealth Management.

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Fed turns to Trump agenda with rate hike nearly in the bag

WASHINGTON - The Federal Reserve inaugurates the Trump era this week with a near-certain interest rate increase and new economic forecasts providing a first glimpse into whether the U.S. election has reshaped the central bank's growth and inflation outlook.

Fed fund futures show a 97 percent probability that the Fed will lift rates by a quarter of a percentage point at the end of its two-day policy meeting on Wednesday, according to the CME Group.

All 120 economists in a Reuters poll expect a rate hike in the wake of a string of solid U.S. economic reports.

More telling will be whether the stock market rally and jump in bond yields triggered by Trump's Nov. 8 victory will push the Fed to an inflection point of its own and a higher projected pace of rate increases for 2017 and beyond.

The Republican businessman is inheriting a good economy, one that grew by 3.2 percent in the third quarter, the fastest pace in two years. There are, however, concerns that his plan to reduce taxes, cut regulation and increase infrastructure spending could not just boost the economy but also fuel higher inflation.

Since first published in 2012, the Fed's quarterly "dot plot" of projected interest rates has generally moved in one direction – down – and any post-election change will show whether policymakers expect Trump's policies to shake things up.

As of September, Fed officials' median projection was for two rate increases next year and a long run "neutral" level of 2.6 percent. A rate increase this week would be the first since last December and only the second since the 2007-2009 financial crisis.

"Their path is going to move up faster and a little sooner," said Steve Rick, chief economist for CUNA Mutual Group. He said the economy was running at its potential, and that was the Fed's cue to "exit stage right" and steadily move rates to normal.

Fed officials have long hoped that other government policies would take the place of monetary engineering, which some believe may have lost its effectiveness in lifting economic growth.

They have warned in recent weeks that any new government spending should specifically be designed to boost productivity in an economy that is already near full employment and facing a high public debt burden.

The Fed's new forecasts will indicate if policymakers feel that the monetary-to-fiscal handover is on the horizon, or need more time for the Trump administration's plans to become more detailed and move through Congress.

Fed Chair Janet Yellen is scheduled to hold a press conference at 2:30 p.m. (1930 GMT) on Wednesday to elaborate on the economic outlook and policy statement.

She'll have a broad set of issues to cover since her last press conference in September - from the Federal Open Market Committee meeting itself, to the likelihood she will be replaced in early 2018 and the risks she foresees from the Trump agenda.

Trump repeatedly attacked Yellen during the election campaign, accusing her of holding down rates to help his Democratic rival. Since the election, he has expressed his disapproval of corporate America, criticizing Boeing, and took credit for a deal to keep hundreds of jobs at an Indiana plant from being moved to Mexico.

The president-elect also will be under scrutiny after this week's Fed meeting for clues about how he plans to handle his relationship with the central bank.

"There is a real risk that he could be openly critical of the decision to raise rates next week," Paul Ashworth, an economist with Capital Economics, said in a note last week.

That could upset markets and raise serious issues about whether Trump intends to leave the Fed alone or try to influence its decisions. Top U.S. elected officials, in particular the president, typically avoid criticizing the Fed's short-term rate decisions, emphasizing instead the need for monetary policy to be set independently.

"If he remains silent after the announcement to raise interest rates next Wednesday, then we can begin to assume that it will be business as usual for the Fed," Ashworth wrote.

WATCHING THE MARKETS

Trump's plan to cut taxes and regulation and funnel fresh billions into capital projects must pass Congress, and it may be well after that before any new programs meaningfully effect economic forecasts.

But policymakers also watch the markets closely. It may be hard for the Fed to stick with its ultra-slow pace of rate hikes if a major tax overhaul and fiscal spending plan are unleashed.

TD Securities analysts said that fiscal policy at this point in the economic recovery could prompt "an inflationary demand shock" that adds nearly a percentage point to economic growth, but spurs the Fed to raise rates much quicker than expected - by nearly an extra percentage point per year.

That scenario of a central bank caught behind the curve and forced to act faster is one that Yellen and other policymakers have said they hope to avoid out of fear it could prompt a recession.

Fed officials in recent days have acknowledged the Trump agenda may cause them to switch gears, though it is not clear how soon.

"At this juncture, it is premature to reach firm conclusions," New York Fed President William Dudley said last week.

But, since Trump won the election, Dudley added, "the stock market has firmed, bond yields have risen and the dollar has appreciated ... Market participants now anticipate that fiscal policy will turn more expansionary and that the (FOMC) will likely respond by tightening monetary policy a bit more quickly than previously anticipated."

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Global markets: Dollar firms, US stocks steady before jobs data

NEW YORK - The US dollar gained on Thursday against a basket of currencies, hitting its highest level in more than two months and pressuring gold prices, as strong labor market data gave support to a possible US interest rate hike later this year.

The benchmark S&P 500 stock index ended barely higher while Treasury yields rose to three-week highs as investors positioned ahead of the closely watched US employment report due out on Friday.

In an encouraging sign for the labor market, data on Thursday showed the number of Americans filing for unemployment benefits unexpectedly fell last week to near a 43-year low.

Oil prices continued to climb, with US crude breaking through $50, spurred by an informal meeting among the world's biggest producers on output cuts and plunging US crude inventories.

The dollar rose to its highest against the yen in a month, and pinned sterling firmly to a three-decade low on worries about Britain's exit from the European Union. Against a basket of currencies, the greenback gained 0.6 percent.

Strong US jobs numbers could cement expectations of a Federal Reserve rate increase later this year and ripple through markets. Economists polled by Reuters forecast non-farm payrolls to increase by 175,000.

Traders were betting on a 64-percent chance the Fed will hike rates in December, up slightly from a day earlier, according to the CME FedWatch website.

"If you look at the economic data for the past month, pretty much across the board it's better and in some cases materially better than expectations," said Walter Todd, chief investment officer at Greenwood Capital Associates in Greenwood, South Carolina. "All of that would seem to push the Fed to move."

In the US equity market, the Dow Jones industrial average fell 12.53 points, or 0.07 percent, to 18,268.5, the S&P 500 gained 1.04 points, or 0.05 percent, to 2,160.77 and the Nasdaq Composite dropped 9.17 points, or 0.17 percent, to 5,306.85.

Gains in Apple, bolstered by optimism about the iPhone, countered a drag from Wal-Mart Stores, which tempered its profit expectations.

The pan-European STOXX index fell 0.4 percent. Shares of British budget airline easyJet tumbled after a weak profit report.

MSCI's gauge of stocks across the globe dipped 0.12 percent.

Europe's benchmark German bond yield edged briefly back above zero, reversing earlier falls, as a selloff in the British government bond market spilled over into the euro area.

Britain's 10-year gilt yield jumped nearly 10 basis points to a three-week high.

Benchmark 10-year US notes were last down 7/32 in price to yield 1.74 percent, up from nearly 1.72 percent late on Wednesday.

Oil rallied to fresh four-month highs.

Brent crude futures settled up 1.3 percent at $52.51 a barrel. US crude settled up 1.2 percent at $50.44 a barrel, eclipsing $50 for the first time since June.

"The fact that you've got crude look like it's willing to hold around that $50 level I think is a positive for the (stock) market," said Chuck Carlson, chief executive officer at Horizon Investment Services in Hammond, Indiana. "That's maybe another confirmation giving a positive tone to future economic activity."

Spot gold dropped 1.1 percent and touched a four-month low, falling for an eighth straight session.

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Fed hike worries seen to drag on trading

MANILA – Investors will likely remain on the sidelines on Wednesday, as they await first half economic growth data, with the prospect of an interest rate increase in the United States before the end of the year weighing on sentiment, an analyst said.

The Philippine Stock Exchange Index closed 0.29 percent higher to 7,983.38 on Tuesday. Asian shares stepped back from a one-year high on Wednesday after the Federal Reserve said a rate increase could come as soon as September.

“Its going to be a quiet day today, with light risk on the downside,” BPI Securities analyst Riche Lim told ANC’s “Market Edge with Cathy Yang.”

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Fed leaves rates unchanged, says risks to outlook reduced

WASHINGTON - The Federal Reserve left interest rates unchanged on Wednesday but said near-term risks to the U.S. economic outlook had diminished, opening the door to a resumption of monetary policy tightening this year.

The U.S. central bank said the economy had expanded at a moderate rate and job gains were strong in June. It added that household spending also had been "growing strongly," and pointed
to an increase in labor utilization.

While Fed policymakers said they continued to closely monitor inflation data and global economic and financial developments, they indicated less worry about possible shocks that could push the economy off course.

"Near-term risks to the economic outlook have diminished," the Fed's policy-setting committee said in its statement following a two-day meeting in which it left its benchmark overnight interest rate in a range of 0.25 percent to 0.50 percent.

The Fed noted, however, that inflation expectations were on balance little changed in recent months, and gave no firm indication of whether it would raise rates at its next policy meeting in September.

Most Fed policymakers had urged caution in raising rates until there was concrete progress in moving inflation toward the central bank's 2 percent target.

"It's a little bit more hawkish, but not much," said Walter Todd, chief investment officer at Greenwood Capital Associates in South Carolina.

The Fed's preferred inflation rate currently stands at 1.6 percent and has been below target for more than four years.

U.S. Treasury prices pared gains after the Fed's decision, while the U.S. dollar briefly strengthened against the euro and yen. U.S. stocks extended declines before later reversing course to trade largely flat in the session.

Federal funds futures implied traders still see roughly even odds of a rate increase at the Fed's December meeting and about a 20 percent chance of such a move in September, a bit lower than before the decision, according to CME's FedWatch Group.

The policy-setting committee will also meet at the beginning of November, but a rate hike at that time is generally seen as unlikely because it would occur a week before the U.S. presidential election.

A Reuters poll of economists suggested the Fed is most likely to wait until December to raise rates.

"There wasn't any tip that the Fed will raise rates in September," said Mike Materasso, co-chair of Franklin Templeton's fixed income policy committee in New York. "A rate increase is warranted this year, most likely at the end of the year, but a lot has to do with a benign world arena."

Kansas City Fed President Esther George was the only policymaker to dissent at this week's meeting. She has favored raising rates at three of the last four meetings.

FOCUS ON DATA, YELLEN

The Fed has held steady on rates since December, when it raised them for the first time in nearly a decade and signaled another four rate increases were in the offing for 2016.

That was scaled back to two hikes this year after central bank policymakers issued new projections in which they also lowered their longer-term growth estimates for the U.S. economy.

A global economic slowdown, financial market volatility and uncertainty over the impact of Britain's June vote to leave the European Union have repeatedly forced the Fed to delay another
rate increase.

The U.S. economy, however, has suffered little initial impact from the so-called 'Brexit' vote. A string of better-than-expected economic data recently as well as an easing in financial conditions also have calmed nerves.

Fed officials will now turn their attention to this Friday's first initial estimate of U.S. gross domestic product for the second quarter, which is expected to show a healthy rebound from the previous quarter.

The economy likely expanded at a 2.3 percent annualized rate during the second quarter, according to the Atlanta Federal Reserve's latest forecast.

The closely-watched U.S. monthly employment report will be issued on Aug. 5, followed three weeks later by a speech from Fed Chair Janet Yellen at the annual central banking conference in Jackson Hole, Wyoming.

Fed policymakers have used the conference to give major steers on central bank policy.


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