Dollar, bond yields advance on Fed rate outlook

Thu Dec 15, 2016 4:50pm EST
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By Caroline Valetkevitch

NEW YORK (Reuters) - The dollar hit a 14-year high and bond yields rose broadly on Thursday, extending gains from a day earlier when the Federal Reserve hiked U.S. interest rates and signaled increases would follow at a faster pace next year.

U.S stocks bounced back from their biggest daily percentage decline in about two months, led by gains in bank shares, while gold hit its lowest since early February.

The Fed's rate rise of 25 basis points to 0.5-0.75 percent 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 <0#FF:> slid to imply an almost 50 percent chance that the Fed would raise rates three times in 2017, with two hikes fully priced in already.

The central bank's decision to raise rates comes as U.S. President-elect Donald Trump, who will be sworn in next month, is expected to cut taxes and boost spending on infrastructure.

"The dollar is reacting very strongly and (bond prices) have continued to struggle and also gold. the combination of those three tell you that interest rates are likely to continue their trajectory higher," said Paul Nolte, portfolio manager at Kingsview Asset Management in Chicago.

"The thought is that earnings will be better and the economy is strong enough to be able to withstand higher interest rates, and that is why we're not seeing a decline in stocks," he said. "That being said, the stronger dollar and higher interest rates will at some point filter through to earnings. It's just a matter of when and how."

The dollar index, which measures the greenback against a basket of six major rivals, was last up 1.3 percent after rising to 103.56, a 14-year high.   Continued...

A man cycles in front of electronic boards showing Japan's Nikkei average (R) and the Dow Jones average (L top) outside a brokerage in Tokyo, Japan, November 10, 2016.   REUTERS/Toru Hanai - RTX2SX78