The dollar surged to a three-week high, bond yields rose and gold fell on Thursday after the US Federal Reserve ended its six-year quantitative easing bond-buying programme.

The decision was widely expected, but a relatively hawkish tone to the accompanying statement was not. It prompted financial markets to rethink the growing consensus that the Fed's first interest rate hike would be late in 2015.

Mixed reaction

Stock market reaction was more mixed. Asian shares mostly fell, following a slight decline on Wall Street overnight. European bourses opened higher on Thursday, helped by encouraging corporate earnings, but quickly turned negative.

The biggest moves were in currency and bond markets. The dollar rose sharply against all its major counterparts, and the two-year US bond yield posted its biggest one-day rise in almost four years.

"Relatively hawkish comments about the labour market caused the dollar to spike strongly as the market readjusted for the next move from the Fed, which senior analyst at FXpro in London.

Overnight borrowing costs

In a statement on Wednesday after a two-day meeting, the Fed retained its basic guidance that overnight borrowing costs would remain near zero for a “considerable time’’.

But it dropped a characterisation of the US labour market slack as “significant’’ in a show of confidence in the economy’s prospects, which markets perceived as a slightly hawkish turn.

Dollar index

In early European trade, the dollar index, a broad measure of the greenback’s trade-weighted value, was up 0.5 per cent above 86.4.

The dollar was up a third of a per cent against the yen, above 109 yen, and the euro was down half-a-per cent at $1.2575.

US Treasury yields

The dollar benefited as US Treasury yields surged, with the benchmark 10-year Treasury note yield climbing to a three-week high of 2.362 per cent. In early European trade on Thursday, it was hovering around 2.33 per cent.

The two-year yield, which is more sensitive to interest rate moves, was above 50 basis points, double the level it was only two weeks ago. It jumped almost 10 basis points immediately after the Fed’s statement on Wednesday.

European markets

European equity markets initially welcomed the Fed’s statement as a sign that the US economy is in good shape, rather than taking fright at the prospect of interest rates perhaps rising sooner than had been expected.

But at 0930 GMT the EuroFirst 300 index of leading shares was down 0.1 per cent at 1317 points. Germany’s DAX was down 0.4 per cent and France’s CAC 40 was down 0.1 per cent, shrugging off upbeat corporate updates from Alcatel Lucent, Technip and Renault.

Britain’s FTSE 100 was down 0.5 per cent, and US futures pointed to Wall Street opening around 0.2 per cent lower.

British bank Barclays set aside £500 million ($800 million) for potential fines resulting from a global foreign exchange investigation. Its shares were up 1 per cent, however, after the bank reported a 15 per cent rise in third quarter profit.

MSCI’s broadest index

MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.5 per cent, while Japan’s Nikkei bucked the trend in Asia and rose 0.7 per cent, as investors took heart from the significantly weaker yen.

Gold fell to a three-week low just above $1,200 an ounce, pressured by the strong dollar. Oil also fell, with US and Brent crude futures down almost 1 per cent to $81.40 and $86.42 a barrel, respectively.

Brazil hikes interest rates

Brazil surprised markets late on Wednesday by hiking interest rates, a bold move that signals President Dilma Rousseff may make market-friendly policy changes after her narrow re-election victory on Sunday.

The rate hike could give the Brazilian real a further lift. It had fallen to a nine-year low against the dollar on Monday after Rousseff defeated market-friendly challenger Aecio Neves, but it recovered ground as some of the pessimism faded.

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