The US Federal Reserve increased rates as expected on Wednesday by a quarter of a point, only the second time it has done so since 2008.
But investors were caught out by surprisingly bullish comments from Fed chair Janet Yellen in the wake of the announcement and by projections showing that 11 of her 17 policy-making colleagues see borrowing costs rising another three times in 2017.
In Asian trading the Australian, Canadian and New Zealand dollars all suffered losses, as well as the Mexican peso.
China’s yuan fell to its weakest level against the dollar in more than eight years as it crept higher towards the seven yuan to one dollar mark. Traders told Reuters that China’s big state-owned banks were intervening heavily in the market to prevent the yuan falling too far from the central bank’s daily fix of 6.9289 yuan per dollar.
The Fed stance came as US president-elect Donald Trump has promised to boost growth through tax cuts, spending and deregulation.
“This is flat out hawkish, and the US dollar is reacting accordingly,” Stephen Innes, senior trader at Oanda in Singapore, said in a note. “I thought we would be calling the Yellen bluff this morning, as the market had expected at most a subtle shift in Fed language.
“However, the Fed’s forward guidance is in reaction to Trumpflation as Dr Yellen did little to quell the markets’ pent up the view that both growth and inflation will accelerate in 2017.”
“The rate hike projections for 2017 being increased to three shows that Fed’s board is having to factor in the impact of Trump’s policies,” said Junichi Ishikawa, senior FX strategist at IG Securities in Tokyo.
The greenback pushed towards 118 yen in Asia, helping to push the Nikkei average of leading shares higher, in contrast to other bourses in the region as traders worried about a flood of cash out of their own economies to higher yields in the US.
Hong Kong shares sank 1.2% and Shanghai lost 0.9% while Sydney was off 0.8%, Seoul shed 0.4%.
Shares in London and Frankfurt were expected to be down slightly when trading opened later on Thursday, according to trading group IG.
In her post-announcement conference, Yellen said: “It’s important for households and businesses to understand that my colleagues and I have judged the course of the US economy to be strong.
“We have a strong labor market and we have a resilient economy.”
Greg McKenna, chief market strategist at CFD and FX provider AxiTrader, said: “This is a big event… the Fed has straight-batted it but is hiking and signalling more than the market expected just on current economic settings.”
By: Martin Farrer and agencies (The Guardian)