Dollar Dives as Fed Pulls in Rate-Hike Horns

LONDON (Reuters) -
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Close-up of American and European currencies. (Olivier Fitoussi/Flash90)

The dollar tumbled on Thursday, lifting world shares to their highest level of the year, after the Federal Reserve scaled down its own expectations of the number of U.S. rate hikes likely over the next nine months.

The Fed, via its “dot plot” system, which charts what rate moves policymakers expect, effectively chopped those forecasts in half, from four hikes to two in a nod to the “global risks” casting a cloud over the world’s largest economy.

It was a signal that triggered a slump in the dollar and a surge in risk appetite that rolled from Wall Street to Asia and then into Europe, although shares there, especially exporters, winced as the euro jumped.

London was off a modest 0.2 percent bolstered by a near 5 percent jump in mining firms, but Frankfurt and Paris were down 1.8 and 1.6 percent and Wall Street was expected to open down too having hit a 2016 high on Wednesday.

Commodity markets continued to cheer however. Brent oil jumped above $41 a barrel as a number of large producers also nailed down a date for an output freeze meeting. Industrial metals such s copper saw their biggest rise in two weeks.

But it was the currency markets that really grabbed attention as the dollar sank to 1½-year and one-month lows against yen and the euro respectively, and emerging market and oil and commodity-linked currencies surged.

“Risk is thoroughly on,” said Société Générale global head of currency strategy Kit Juckes. “All the chit-chat was that they [the Fed] were going to be hawkish, and they weren’t.”

“The dollar is obviously the loser, but it’s good for shares, it’s good for oil, and good for debt too, I would say.”

World growth concerns, particularly regarding China, have rattled markets through much of this year, and this was seen to have influenced the Fed’s shift in position as it cited the “global risks” facing the U.S. economy.

The dollar was showing no sign of stabilizing as U.S. trading began, having sliced all the way down to 110.77 yen and catapulted the euro above $1.13 for the first time since mid-January.

Currency traders were suddenly betting that the greenback rather than the euro will be heading south, and commodity-linked currencies rose strongly as products such as oil and iron ore also soared on Fed hopes.

The Australian dollar, which had already jumped 1.2 percent overnight, caught a fresh lift from an upbeat local jobs report and rose to an eight-month high of $0.7620.

The Canadian dollar was firm at just under C$1.30 to the U.S. dollar after rallying nearly 2 percent to a four-month peak of C$1.3094 overnight.

Despite Europe’s reversal, MSCI’s 46-country All World share index climbed over 0.8 percent on the day to reach its highest since Jan 4., the opening trading day of 2016 for most major markets.

For emerging markets, the news was even better as a more than 2 percent surge took the volatile asset class’s stocks to their highest since mid-December and currencies and debt rallied too.

One outlier was South Africa, though, ahead of a meeting of its central bank after another week in which the rand has been hammered by political worries.

In the latest twist, South Africa’s deputy finance minister received a death threat shortly before he publicly accused a wealthy family with links to President Jacob Zuma of offering him the job of finance minister, a newspaper said on Thursday.

Zuma has previously said his ties with the family are above-board. His office was not immediately available to comment, although he is due to answer questions in Parliament on Thursday.

The Malaysian ringgit, Indonesian rupiah and South Korean won all rose more than 1 percent against the dollar as a clutch of Asian currencies hit multimonth peaks.

“In the past, when the dollar weakened after the Fed was dovish, the dollar weakness lasted for maybe about three to four months,” said Tan Teck Leng, FX strategist for UBS chief investment office Wealth Management in Singapore.

“But is this the end of the strong dollar? We don’t think so,” he said, adding that the Fed could start sounding hawkish again around June and July to pave the way for a rate rise, possibly in September.

MSCI’s broadest index of Asia-Pacific shares outside Japan climbed to a two-month high as Australian stocks added 1 percent, South Korea’s Kospi rose 0.9 percent and Shanghai was up 1 percent.

The jump in the yen meant Japan’s Nikkei lost out though, as it closed down 0.2 percent.

Oil prices, the other main driver of global market sentiment in recent months, rose to a three-month peak of $39.54 a barrel after surging nearly 6 percent overnight. Brent was up 95 cents at $41.27 a barrel.

Three-month copper on the London Metal Exchange traded up 1.5 percent at $5,065 a ton. A weaker greenback tends to favor commodities traded in dollars by making them cheaper for non-U.S. buyers.