Hawkish Fed sends U.S. dollar soaring; bank stocks rally

Wed May 18, 2016 4:51pm EDT
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By Rodrigo Campos

NEW YORK (Reuters) - The U.S. dollar touched a seven-week high against major currencies on Wednesday after the Federal Reserve signaled an interest rate rise could happen as soon as June, while stocks on Wall Street were buoyed by the resulting rally in bank shares.

The Fed will likely raise interest rates in June if economic data points to stronger U.S. second-quarter economic growth along with higher inflation and employment, according to minutes from the U.S. central bank's April policy meeting.

Markets had earlier priced in one interest rate hike from the Fed this year, but this week's U.S. inflation data, recent comments from several Fed policymakers, and the minutes of the last policy meeting published on Wednesday have now all led analysts to see monetary policy tightening soon.

Futures markets see the probability of an interest rate rise in June at 34 percent, up from 15 percent on Tuesday, and the likelihood of a July rise at 54 percent, up from 33 percent, according to CME FedWatch.

Bank stocks rose on Wednesday, as banks are seen benefiting from higher interest rates, while technology was the second-best performing sector, helping to reduce losses on Wall Street seen earlier in the day.

"The cyclical sectors on the stock market are doing better, so there’s a bullish undertone to the idea that the Fed will finally start to normalize interest rates," said Jim Paulsen, chief investment strategist at Wells Capital Management in Minneapolis.

"I think it is high time that the Federal Reserve starts to normalize policy. We’ve tried this for seven years, let’s try something new. If the Fed shows confidence the private sector might do the same," he said.

The Dow Jones industrial average .DJI fell 3.36 points, or 0.02 percent, to 17,526.62, the S&P 500 .SPX gained 0.42 points, or 0.02 percent, to 2,047.63 and the Nasdaq Composite .IXIC added 23.39 points, or 0.5 percent, to 4,739.12.   Continued...

Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., May 16, 2016.  REUTERS/Brendan McDermid