Published: Fri, June 16, 2017
Markets | By Noel Gibbs

Dollar gains as Fed sticks to guns on policy tightening

Dollar gains as Fed sticks to guns on policy tightening

Japan's Nikkei share average fell in choppy trade on Thursday, after weak USA inflation data overshadowed an interest hike by the Federal Reserve. The hike will push rates above 1 percent for the first time since the immediate aftermath of the collapse of Lehman Brothers in 2008.

LONDON, June 15 Stocks fell in Europe and Asia on Thursday as investor concern over the pace of US economic growth overshadowed a widely telegraphed rise in Federal Reserve interest rates that lifted the dollar off recent lows.

The increase in the Fed's short-term rate was the second rate hike this year and the fourth since it began raising rates in December 2015.

The Fed's determination to stick to its strategy of policy normalisation triggered a reversal in the dollar and also led to a small recovery in United States bond yields.

It acknowledged the continuous progress in the labor market while expressing concerns over weak inflation.

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USA jobless claims were slightly lower than expected at 237,000 in the latest week from 245,000 previously while there was a sharp increase in the New York Empire index to 19.8 for June from -1.0 in May. "Household spending has picked up in recent months, and business fixed investment has continued to expand", said the Fed in the statement.

The Fed also detailed how it plans to unwind its $4.5 trillion balance sheet, which is a bundle of Treasuries, mortgage-backed securities and government agency debt. However Fed Chair Janet Yellen said that condition are in place for prices to eventually pick up.

She added that the plan aims to avoid creating market strains, and to allow the market to adjust to a very gradual and predictable plan.

US stocks closed mixed Wednesday, with the Dow Jones Industrial Average refreshing its closing record, as investors digested the Federal Reserve's decision to raise interest rates by a quarter point.

S&P 500 e-minis were up 3 points, or 0.12 percent, with 92,828 contracts traded.

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Dow e-minis were up 37 points, or 0.17 percent, with 5,550 contracts changing hands.

MSCI's broadest index of Asia-Pacific shares outside Japan dropped 0.7 percent, led by resource shares.

Against its Japanese counterpart, the dollar rose 0.1 percent to 109.57 yen, above Wednesday's eight-week low of 108.81 yen. However, the price of gold went down.

"The recent run of weaker core inflation readings has clearly rattled some Fed officials".

The Fed said it expects U.S. inflation to be at 1.7 per cent by the end of this year, down from the 1.9 per cent previously forecast. As far as interest rates are concerned, the median forecast was for one further rate increase by the end of 2017.

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The relatively firm Federal Reserve statement from Wednesday and an unexpected 5-3 Bank of England vote to hold interest rates at 0.25% had some impact in shifting expectations surrounding global central bank policies with a slightly more hawkish slant than had been priced in.

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