* Fed raises rates, "dot plots" surprise on upside
* Dollar at 14-yr high on FX basket, smashes key euro levels
* Europe shares rise along with bank stocks, Wall St steady
* Oil stabilises after paring gains, gold at 10 month low
* Graphic: World FX rates in 2016 tmsnrt.rs/2egbfVh
By Marc Jones
LONDON, Dec 15 The dollar charged to a 14-year
high and government bond yields rose sharply on Thursday after
the Federal Reserve hiked U.S. interest rates and signalled more
would follow at a faster pace next year.
European shares cheered a 2.5 percent rise in bank
stocks on the prospect of a boost to their profits
and the Dow Jones index looked set for another run at 20,000
points. But the main action was elsewhere.
Bond markets saw yields on short-term U.S. debt surge to the
highest since 2009, sending the dollar galloping past key euro
levels, to a 10-month peak on the yen and prompting China to set
the yuan at its weakest in eight years.
The Fed's anticipated policy path, and expectations that
Donald Trump as U.S. president will get growth motoring, are
keeping emerging markets on edge as capital gets sucked from
more fragile, export-dependent economies toward dollar-based
The Fed's rate rise of 25 basis points to 0.5-0.75 percent
was well flagged but investors were spooked when the "dot plots"
of members' projections showed a median of three hikes next
year, up from two previously.
"You had the Fed come in and be a bit more hawkish than many
people, including us, were expecting," said TD Securities head
of global strategy Richard Kelly.
"It wasn't just the move in the dots, it was the language
that was used. There was an acknowledgement that if Trump gets
his plans moving through Congress you could see the economy
The Fed's economic projections have hardly been upgraded,
suggesting it could accelerate the monetary tightening even
further if policymakers see firmer evidence of higher growth or
Fed fund futures <0#FF:> slid to imply an almost 50 percent
chance that the Fed would raise rates three times, with two
hikes fully priced in already.
The dollar continued to rise in European trading. It hit a
10-month high of 117.87 and then jumped through $1.0425
per euro, while the difference in yields on benchmark
10-year U.S. and German government bonds ballooned to the widest
since at least 1990.
Those U.S. yields rose as far as 2.63 percent,
having already risen more than 0.8 of a percentage point since
Trump was elected last month. The jump in 2-year Treasury paper
was the biggest daily rise since early 2015 as it
topped 1.29 percent.
"One of the reasons why a bond market sell-off this time
around looks more sustainable is because it can be accompanied
by higher equity markets," Peter Schaffrik, chief European macro
strategist at RBC Capital Markets said.
For Reuters Graphic on the Fed, click on
The allure of higher U.S. yields raises risks for emerging
markets, as funds look to take advantage of rising U.S. rates
rather than put their money in traditionally riskier economies.
China's central bank reacted to the Fed's move by setting
the yuan mid-point at 6.9289 to the dollar, its
weakest since June 2008, though market players noted that the
yuan has been firmer against many other currencies and rose on
Currencies such as the Singapore dollar and Korean
won came under pressure, and analysts anticipate most
low-yielders will be on the back foot in an environment of a
rising dollar, higher yields and weaker yuan.
Mexico, whose markets have been battered hardest by
Trump's threats to tear up trade deals, holds a central bank
meeting later where it is expected to hike its own interest
rates in response to the Fed and try to prevent further damage.
The Bank of Korea gave a taste of the challenges many EM
economies face. It held its key rate at a record low of 1.25
percent despite flagging the growing risks on its export-reliant
Globally emerging market stocks fell 1.6 percent,
though developed economies and the major currencies were at the
dollar's mercy too.
The euro dropped to as low as $1.0425 despite some
upbeat economic data. The break below its March
2015 low of $1.0457 was a significant milestone, opening the way
for a test of $1, or parity against the dollar, which last
happened in late 2002.
That drew reaction from Switzerland, which is highly
sensitive to the euro's moves. Its central bank head said
another cut in Swiss interest rates couldn't be ruled out,
though the Swiss franc took little notice.
Wall Street was expected to open higher when it resumes,
having suffered on Wednesday its biggest percentage decline
since before the Nov. 8 U.S. presidential election.
That decline was modest, however, compared with the strong
gains of the last month that have set a string of record highs
and put the Dow Industrial index within touching distance of
Among commodities, oil prices stabilised as a tighter market
looms in 2017 due to planned output cuts led by OPEC and Russia.
Earlier they had seen sharp declines following the Fed's action.
Brent crude futures traded up a shade at $54.33 per
barrel, having lost some of the ground overnight made earlier in
the week that had taken it a 1 1/2-year high.
Gold dropped to its lowest in more than 10 months around
$1,135.1 an ounce and last stood at $1,138.
"The outlook for gold is not particularly great," said ANZ
analyst Daniel Hynes. "The more hawkish comments from the Fed
are clearly a headwind in the short-term ... The selling seen
this morning is just the start of things to come."
For Reuters new Live Markets blog on European and UK stock
markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets
(Additional reporting by Wayne Cole in Sydney and Hideyuki Sano
in Tokyo; Editing by Tom Heneghan)