The dollar rallied to its strongest level since 2003 against the euro, while gold plunged as the prospect of a steeper path for U.S. interest rates going forward filtered through markets. U.S. stocks rebounded from their worst day in two months as havens retreated.
Financial shares drove gains in major American equity benchmarks, while interest rate-sensitive stocks slipped after 10-year Treasury yields reached their highest level in more than two years. The greenback extended its advance against major and emerging-market peers after the Federal Reserve’s first, and last, rate hike of 2016 came with an increase in the number of increases expected next year. Gold tumbled to a 10-month low.
The Fed’s pivot toward hawkishness is a step in the shift away from central-bank policy dominating market sentiment, with the potential for an increase in fiscal stimulus now in focus. While stocks have rallied and bonds have tumbled since Donald Trump’s election as U.S. president fueled bets on an uptick in spending, the Fed stands largely alone in actively tightening policy, fueling the dollar’s surge. The Bank of England kept its key rate at a record low Thursday, a week after the European Central Bank extended quantitative easing.
“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.”