U.S. Dollar Surges Broadly on Hawkish Fed

By James Glynn

SYDNEY -- The U.S. dollar is sharply higher in early Asia trading, with the yen hardest hit after the U.S. Federal Reserve announced its first interest-rate increase in 2016 overnight and signaled it expects to increase rates more quickly than previously anticipated in 2017.

Fed officials said they would increase the federal-funds rate by a quarter percentage point to between 0.50% and 0.75%, a move consistent with a brightening economic outlook.

The Fed now expects the median fed-funds rate to be 1.4% by the end of 2017, reaching 2.1% at the end of 2018 and 2.9% in 2019. That implies three quarter-percentage-point interest-rate increases over each of the next three years, a faster pace than officials projected in September, when they only saw two rate increases next year.

Currency traders said the full extent of the reaction to the Fed rate increase won't be known until European markets have had time to absorb the news.

The reaction in currency markets in early Asia has seen the U.S. dollar jump to its highest levels since February against the yen, with broad gains also posted against the euro and dollar bloc currencies.

The U.S. dollar climbed above 117.0 yen after trading closer to 115.0 yen ahead of the Fed announcement. WSJ Dollar Index is up 0.8% to 91.12, which would mark its highest closing value in more than 14 years. The Australian, Canadian and New Zealand dollars were sharply lower against the greenback.

Richard Grace, the global head of currency strategy at the Commonwealth Bank of Australia, said the Fed is navigating its way through some tricky waters. Fed Chairwoman Janet Yellen has acknowledged the potential for stronger GDP growth if big infrastructure spending by the Trump White House occurs, while also acknowledging monetary conditions have tightened in the past month through a higher U.S. dollar and big increases in U.S. bond yields, he said.

There was a fairly uniform rise in U.S. bond yields overnight, with the 10-year yield climbing to 2.54% from around 2.44% on the Fed announcement.

Ray Attrill, the global head of currency strategy at National Australia Bank said "this is what happens when two (interest rate increases) becomes three."

All currencies have been "smashed" against the U.S., with the yen leading the pack

"Some of the (Fed) members are taking on board the prospect of more growth-supportive and inflationary fiscal policy next year," Mr. Attrill said.

Still, Ms. Yellen has indicated that it is too early to make assumptions about what might happen to the world's largest economy if the budgetary purse strings in Washington are loosened next year, Mr. Attrill added.

Traders said they were also on edge about the potential for increased friction between the Fed and Mr. Trump.

Ms. Yellen had several opportunities to offer critiques of some of the ideas that have been floated for economic policy but refrained from taking the bait. Still, she emphasized the importance of the Federal Reserve's independence several times.

Write to James Glynn at james.glynn@wsj.com

(END) Dow Jones Newswires

December 14, 2016 17:39 ET (22:39 GMT)

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