Signals the Federal Reserve will hike US interest rates again this year and begin the 'Great Unwinding' of a decade of aggressive stimulus, drove the dollar to a two-month high versus the yen on Thursday and sent bonds and commodities lower.

Traders reacted predictably to what had been a heavily-flagged move from the Fed, which was then followed unsurprisingly in Asia as the Bank of Japan kept its monetary spigots open at full.

Along with the dollar bulls, European bank stocks cheered the prospect of higher interest rates which should help their profits. They rose over 1.5 per cent as a weaker euro helped the pan-European STOXX 600 generally too.

Shorter-term, 2-year US government bond yields, which move inverse to price, steadied after hitting their highest in nine years. The dollar's rise as far as 112.725 yen had been set its strongest mark since July 18.

“Initial reaction is fairly straightforward,” said Saxo Bank head of FX strategy John Hardy.

“They (the Fed) still kept the December hike (signal) in there and the market is being reluctantly tugged in the direction of having to price that in.”

Fed rate hike prospects

Interest rate futures are now pricing in about a 70 per cent chance of a December Fed rate hike according to CME's 'FedWatch' tool, up from above 50 per cent prior to the Fed meeting and under 40 per cent just a few weeks ago.

The euro shed 0.1 per cent to $1.1883 after dropping 0.8 per cent the previous day, when it reversed a four-session winning run.

Draghi's speech

European Central Bank President Mario Draghi is due to speak later at a conference on financial stability, while the bank's chief economist Peter Praet also chairs a policy panel at a conference.

The yield on Germany's 10-year government, the benchmark for the region, was 4 basis points higher in early trade at 0.48 per cent, its highest since early August. It is still well below the US equivalent.

The gap between United States and German 10-year borrowing costs narrowed a touched to 179 bps having struck 184 bps - its highest in a month - on Wednesday.

Spanish government bonds moved roughly in line with peers, having underperformed on Wednesday after Spanish police raided Catalan government offices and arrested officials on Wednesday to halt a banned referendum on independence.

“The central Spanish government's increasingly rigorous line of action in response to Catalonia's aspirations to independence triggered profit-taking on Spanish debt instruments, which subsequently spilled over to BTPs (Italian debt),” DZ Bank analyst Rene Abrecht said.

Commodity prices

The higher dollar strained commodity markets, where the underlying raw materials are priced in the US currency.

Gold hit a three-week low of $1,296 per ounce, Brent and WTI oil eased away from multi-month highs, while industrial metals copper and nickel tumbled 1 and 3 per cent to more than one-month lows.

Brent crude futures last stood at $56.17, down slightly from late US levels as US benchmark West Texas Intermediate (WTI) drifted down to $50.64.

There were other beneficiaries though from the shift up in the dollar. Japan's Nikkei closed up 0.2 per cent as the yen's fall against the dollar after the Fed's decision helped sentiment around exporters.

The Bank of Japan, as widely expected, also left its policy settings unchanged.

“The BOJ will patiently continue accommodative monetary policy to achieve 2 per cent inflation... As such, we will take further monetary easing steps if necessary,” its Governor Haruhiko Kuroda said at his post-meeting news conference.

Related Topics
comment COMMENT NOW