LONDON (Reuters) - The dollar vaulted to a six-year peak against the yen on Thursday as the Federal Reserve’s outlook for rising interest rates underlined the diverging path between the United States and the rest of the rich world.
It came as the European Central Bank prepared to turn its liquidity taps back on in full after a 2-1/2 year break, and as voters in Scotland started hitting the polls to decide whether to separate from the rest of the United Kingdom.
With the Fed renewing its pledge to keep interest rates near zero for a considerable time and the ECB aiming its cash hose, European shares opened firmer.
The Scotland uncertainty kept the pressure on a flat FTSE in London, but France’s CAC40 and the Dax in Germany climbed 0.2 and 0.4 percent respectively to give the region a positive overall slant.
The ECB will announce at 0915 GMT (10:15 a.m. BST) how much banks will take in the first round of its new four-year loans.
The programme is the bank’s flagship tool in a new stimulus package it hopes will stave off deflation and revive the ailing euro zone economy. Traders polled by Reuters expect just over 130 billion euros (102.61 billion pounds) to be taken in Thursday’s round.
“The question is, how will the market react to the number?” said Elwin de Groot, euro zone strategist at Rabobank. “We think a low uptake (100 billion euros) will only fuel expectations of QE (asset purchases with new money) further down the line and that will put pressure on rates.”
“If it is really above that, the market could interpret it as reducing the chances of QE. But at the same time it would increase excess money market liquidity. So in that scenario you could see quiet a bit of steepening (of the yield curve).”
German bond yields rose in early trading in the wake of the Fed’s projected future rate rises although pressure on shorter-dated bonds was cushioned by the ECB.
While the Fed maintained language suggesting that rate hikes would not happen for a “considerable time,” it also indicated Fed policymakers think it could raise borrowing costs faster than expected when it starts moving. [TOP/CEN]
The upshot was that the euro skidded to a 14-month trough before stabilising, while gold hit an eight-month low as the dollar swept higher across the board, a move many investors have been itching to wager on all year.
“The Fed clearly signalled overnight that although it is not imminent, they are increasingly confident they will start raising rates next year,” said Lee Hardman, a strategist with Bank of Tokyo-Mitsubishi UFJ in London.
In Asian markets, the reception was mixed, with MSCI’s index of ex-Japan Asian shares falling to 12-week lows, on the spectre of rising U.S. rates and slower economic growth in China.
A weaker yen is generally viewed as positive for Japanese exports and company earnings though and helped lift the Nikkei 1.1 percent to its highest level since January and the broader Topix index to ground not visited since 2008.
The dollar began European trading almost 1.5 percent higher against the yen than 24 hours earlier, at 108.87 yen.
Futures markets <0#FF:> still lean more towards a Fed rate move in June. But whatever the timing, U.S. rates do seem certain to be heading higher while central banks in the euro zone and Japan remain committed to super-easy monetary policy.
Bond investors reacted with more calm than those in currency markets, and nudged yields on the benchmark 10-year note up a modest 2 basis points to 2.62 percent.
Still, a rise in two-year yields to 0.57 percent widened their premium over German debt to 63 basis points, the fattest margin since early 2007.
With the Fed out of the way, the next big test for markets will be Thursday’s referendum on Scottish independence.
The latest opinion poll by Survation showed support for staying in the United Kingdom at 53 percent, giving sterling a mild lift. The pound was at $1.63, having been as low as $1.6052 earlier in the month.
In commodities, the rise of the dollar was a dead weight on prices. Gold steadied at $1,223.21 an ounce after having touched an eight-month trough of $1,216.01.
Oil prices were further pressured by a government report showing U.S. crude stocks rose sharply last week.
Brent crude and U.S. crude were both down 0.5 percent on Thursday at $98.50 a barrel and $94.10, respectively.
(This version of the story has been corrected to change day in lede to Thursday (not Friday))
Additional reporting by Wayne Cole in Sydney; Editing by Catherine Evans