The U.S. dollar rose in early European trade Thursday, after the
Federal Reserve met expectations by calling an end to quantitative
easing, but caught the market off guard as it adopted a more
optimistic tone on the economy, leading some strategists to bring
forward forecasts for a first rate rise.
Even though the central bank did reassure that rates would
remain accommodative for "considerable time", investors interpreted
the central bank's rhetoric as more hawkish than before, especially
in terms of the labor market.
"The Fed dismissed recent turmoil in global financial markets
and focused instead on U.S. employment gains," fixed income
strategists at RBC wrote in a note, adding that the statement
suggests that the committee is preparing the market for "a much
bigger change in December."
"This is all part of getting the market ready for the eventual
first rate hike," they added.
BNP Paribas strategists said the comments on the labor market
signaled that the market had pushed back expectations of a first
increase too far.
"We think markets will ultimately bring rate hike expectations
much further forward to reflect a second quarter [of 2015] rate
hike, providing support to the U.S. yields and the U.S. dollar,"
they wrote in a note.
Early in Europe, the buck was trading 0.4% higher against the
euro at $1.2585 and around 0.5% stronger against Japan's yen at
Yen109.22. The yield on the 10-year U.S. Treasury note moved around
0.05 percentage point higher after the announcement Wednesday, and
was little changed at around 2.33% in early European trade
Thursday.
Later in the day, attention will shift to the first release of
third-quarter U.S. gross domestic product data. Lee Hardman, a
currency strategist at Bank of Tokyo Mitsubishi UFJ, said he
doesn't expect the reading to support the dollar much more.
"The release next week of a strong nonfarm payrolls report for
October, however, could provide the trigger for further U.S. dollar
gains," he said.
Despite U.S. equities only recording marginal gains on
Wednesday, European indexes started the session broadly stronger
supported by some forecast-beating earnings.
Shares in French telecom-gear maker Alcatel-Lucent SA rose more
than 12% after the company said that its third-quarter loss had
narrowed more than expected. Compatriot car maker Renault SA late
Wednesday reported a 6.7% rise in revenue and confirmed its
guidance for the year, which sent shares more than 5% higher in
early trade Thursday and helped Paris CAC index to advance
0.8%.
The Stoxx Europe 600 was 0.6% higher, while Germany's DAX and
France's CAC added 0.6% and 0.8% respectively. London's FTSE was
broadly unchanged on the day.
Write to Josie Cox at josie.cox@wsj.com
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