The US Dollar strengthened by 1% and hit a 14-year high against major Currencies, mainly Euro, after the Federal Reserve decided on Wednesday December 14, to raise its benchmark Interest Rate, and upped its expectation for the number of rate hikes in 2017.
This move is set to increase the target of the Federal Funds rate by 25 points to a range of 0.50 to 0.75%. By continuing to lift rates from near zero, Fed is gradually ending an era of unprecedented Monetary Policy support to give the economy the chance to advance without relying on it, as the Trump administration will be taking over with promises to boost growth through tax cuts, spending and deregulation. This second rate hike in ten years, is supposed to lift rates for credit cards and mortgages and test the extent to which consumer spending and business investment can propel the economy without needing the Fed stimulus.
US Federal President Janet Yellen took a rare victory lap during the press conference signaling that the economy remains strong and will improve further. Yellen added that the labor market didn’t need fiscal boosting to achieve full employment and expected that with “gradual adjustments” in monetary stance, the economy will continue to expand at a moderate pace and labor market conditions will somewhat strengthen further.
The Fed is expecting to raise rates three times throughout the upcoming three years, which made the European bank stocks to climb on Wednesday while bonds and Gold slumped to a 10-month low. As for the Canadian Dollar, it fell from an 8 week high against its US counterpart, pressured by lower oil prices, Canada’s major exports, as well as broader gains for the greenback.
The greenback extended its advance against major and emerging-market peers while 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. The US Dollar also climbed 1.2% against the yen, reaching the highest level since February 2015, making Japan’s Nikkei share average rise 0.3% on Thursday. Policy makers in Norway, South Korea and Switzerland kept rates on hold yesterday, and the Bank of England is predicted by analysts to do the same.
Stephen Gallo, currency analyst at BMO Capital Markets, London commented that “The Fed is becoming a leopard with new spots” that shifted its 2017 bias away from supporting growth with “ultra-stimulated policies towards keeping a lid on inflation risk.”