Dollar hits 14-year high against euro as US rate hike eyed

The dollar soared against the euro on Thursday to levels not seen since late 2002 after the US Federal Reserve signalled it is likely to increase interest rates more quickly next year than the market had expected.

The greenback rose to $1.0367 against the euro by the time European markets closed, compared to $1.064 immediately before the US rates announcement on Wednesday evening. Financial markets had priced in the Federal Reserve’s move to raise interest rates by 0.25 per cent, but it caught investors off-guard by forecasting three further hikes next year, having previously projected two increases.

While Federal Reserve chair Janet Yellen said that it was too early to judge the impact of US president-elect Donal Trump's planned expansionary budget plans, members of the rates-setting body "may have wanted to get ahead of the curve before a potentially large fiscal stimulus next year", said David McNamara, an economist with Davy in Dublin.

A weakening euro and the fact that the view that Federal Reserve appears more confident about the world's largest economy lifted European stocks, sending the Iseq in Dublin above levels seen before UK voters decided to quit the European Union in June.

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By contrast, the European Central Bank decided last week to extend its massive stimulus programme, known as quantitative easing, until the end of next year to try and boost inflation and growth. Most economists do not see it increasing its main interest rate, currently at zero, until 2019.

European stocks

"I believe that market participants are replaying the theme that a US hike means a stronger dollar and a weaker euro, which is good for European stocks overall," said Stephane Ekolo, chief European strategist at Market Securities in London. "If you add expectation for a rise in economic growth and inflation in Europe and a recovery in earnings, all that bodes well for European stocks at the moment."

The Iseq rose by 1.7 per cent to 6,471.5 points, some 100 points above the level it had been at on June 23, hours before the shock Brexit vote emerged.

Among individual Irish stocks, Bank of Ireland jumped 6.1 per cent to 24.4c, as bond prices fell globally, sending yields rising, which is seen as positive for bank earnings. Rising bond yields will also help narrow Bank of Ireland's pensions deficit, which almost doubled in the first in the first nine months of the year to €1.45 billion.

Shares in CRH, which makes 60 per cent of its profits in the US, gained 1.9 per cent, while Glanbia, which generates more than half its revenue in the US, added 3.1 per cent.

Elsewhere, Germany’s DAX Index rose by 0.6 per cent to its highest close in more than a year.

Oil futures prices fell as much as 2.1 per cent by early trading in New York, having dropped 3.7 per cent on Wednesday, as a result of the dollar strengthening against other major currencies. However, it managed to rally 0.6 per cent to $51.34 by mid-afternoon trading.

– (Additional reporting: Bloomberg)