Dollar Climbs to Strongest Since 2003 on Fed Path; Bonds Drop
The dollar climbed the highest level since 2003 against the euro as the prospect of a steeper path for U.S. 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. U.S. 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.
Bank of England Holds Rate and Says Inflation Rise May Slow in 2017
The Bank of England kept its key interest rate at a record low and noted that the pound’s recent appreciation may mean a slower pickup in inflation next year. In its last policy decision of 2016, the Monetary Policy Committee said sterling’s advance could mean “less of an overshoot” above its 2 percent goal than previously predicted. It still sees a pickup in price growth and repeated its line that it has limited tolerance for exceeding its target. Emphasizing its balancing act between managing inflation and growth, the MPC also said the economy will cool in 2017 as consumer spending weakens and the vote to leave the European Union rattles investment plans.
JGBs slip, taking cue from U.S. Treasuries on hawkish Fed
Japanese government bond prices fell on Thursday, with the benchmark 10-year JGB yield matching this week’s 10-month high in the wake of a rise in U.S. Treasury yields after the Federal Reserve projected a greater number of interest rate hikes next year. The benchmark 10-year yield added 2.5 basis points (bps) to 0.080 percent, while 10-year JGB futures finished down 0.25 point at 149.72. The Federal Reserve’s 25 basis-point interest rate increase on Wednesday was widely anticipated by financial markets. After the Fed signalled three hikes instead of two in 2017, the yield on 10-year Treasuries rose as high as 2.587 percent, its highest level since September 2014.