US dollar climbs to strongest since 2003 on Fed path; bonds drop

[LONDON] The US dollar climbed the highest level since 2003 against the euro as the prospect of a steeper path for US interest rates next year filtered through markets. European bank stocks climbed while bonds and gold slumped.

The greenback extended its advance against major and emerging-market peers after the Federal Reserve's first and only interest-rate hike of 2016 was accompanied with a signal of three increases next year.

European banks rallied to near an 11-month high on bets that higher rates will make lending more profitable, while a measure of stock volatility in the region fell to a two-year low.

US 10-year yields reached the highest level in more than two years, while 30-year bunds led a decline in German securities. China's 10-year benchmark headed for its biggest one-day increase and gold fell to a 10-month low.

The Fed's move has added to speculation of a shift away from global central-bank policy and toward fiscal stimulus that has helped fuel a rally in stocks and rout in global bonds since the election of Donald Trump in November.

Still, the US central bank stands largely alone in actively tightening policy, boosting the US dollar against its peers.

The Bank of England kept its key rate at a record low Thursday, mirroring moves by policy makers in Norway, South Korea and Switzerland. The European Central Bank last week extended quantitative easing through 2017, depressing the euro.

"At the moment it feels like going long dollar is free money, no one loses," said Stuart Bennett, head of Group-of-10 currency strategy at Banco Santander SA in London.

"The market believes it can push for another two to three percent relatively risk-free, a nice Christmas bonus. The market never appears to need a reason to be negative about the euro."

The US dollar gained 1.1 per cent to US$1.0421 per euro, the strongest since Jan 2003 as of 7.18 am in New York. It advanced one per cent against the yen after reaching the highest level since February.

Britain's pound fell 0.7 per cent against the US currency after the BoE said its inflation target is more attainable than previously predicted.

The Fed lifted its target for overnight borrowing costs by 25 basis points, or 0.25 percentage point, on Wednesday to a range of 0.5 per cent to 0.75 per cent. Policy makers expect three rate increases in 2017, up from the two seen in September.

The Stoxx Europe 600 Index rose 0.5 per cent, with banks leading advances.

Randgold Resources Ltd, Fresnillo Plc and Centamin Plc fell at least eight per cent with declines in precious metals, while Electricite de France SA sank the most on record after saying profit will drop next year.

The VStoxx Index declined nine per cent to the lowest level since September 2014, signaling traders are pulling back from hedging against swings in euro area shares.

In the US, futures on the S&P 500 Index were little changed after the equity gauge posted its biggest loss in two months on Wednesday.

Yields on 10-year Treasury notes rose three basis points to 2.6 per cent, after touching their highest level since Sept 2014.

German 30-year bund yields rose eight basis points to 1.15 per cent.

China's 10-year sovereign yield surged 22 basis points to 3.45 per cent, set for a record increase on a closing basis, as a plunging yuan and hawkish Fed comments damped expectations of monetary easing in China.

Gold for immediate delivery was down one per cent to US$1,131.5 an ounce, after touching its lowest price since February. The commodity has lost 14 per cent since the end of September.

West Texas Intermediate crude was up 0.3 per cent at US$51.18 a barrel, after Wednesday's 3.7 per cent slide. Libya is preparing this week to ship the first cargo from its largest export terminal in two years.

BLOOMBERG