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Dollar surges as Fed ends QE on hawkish note

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October 30
6:08 AM 2014

The dollar surged to a three-week high, bond yields rose and gold fell on Thursday after the U.S. Federal Reserve ended its six-year quantitative easing bond-buying program.

The decision was widely expected, but a relatively hawkish tone to the accompanying statement was not. It prompted financial markets to rethink the growing consensus that the Fed's first interest rate hike would be late in 2015.

Stock market reaction was more mixed. Asian shares mostly fell, following a slight decline on Wall Street overnight. European bourses opened higher on Thursday, helped by encouraging corporate earnings, but quickly turned negative.

The biggest moves were in currency and bond markets. The dollar rose sharply against all its major counterparts, and the two-year U.S. bond yield posted its biggest one-day rise in almost four years.

"Relatively hawkish comments about the labor market caused the dollar to spike strongly as the market readjusted for the next move from the Fed, which senior analyst at FXpro in London.

In a statement on Wednesday after a two-day meeting, the Fed retained its basic guidance that overnight borrowing costs would remain near zero for a "considerable time".

But it dropped a characterization of the U.S. labor market slack as "significant" in a show of confidence in the economy's prospects, which markets perceived as a slightly hawkish turn.[ID:nL1N0SO24I]

In early European trade the dollar index, a broad measure of the greenback's trade-weighted value, was up 0.5 percent above 86.4 .DXY.

The dollar was up a third of a percent against the yen, above 109 yen JPY=, and the euro was down half a percent at $1.2575 EUR=.

The dollar benefited as U.S. Treasury yields surged, with the benchmark 10-year Treasury note yield US10YT=RR climbing to a three-week high of 2.362 percent. In early European trade on Thursday it was hovering around 2.33 percent.

The two-year yield, which is more sensitive to interest rate moves, was above 50 basis points, double the level it was only two weeks ago. It jumped almost 10 basis points immediately after the Fed's statement on Wednesday.

European equity markets initially welcomed the Fed's statement as a sign the U.S. economy is in good shape, rather than taking fright at the prospect of interest rates perhaps rising sooner than had been expected.

But at 0930 GMT the EuroFirst 300 index of leading shares was down 0.1 percent at 1317 points .FTEU3. Germany's DAX .GDAXI was down 0.4 percent and France's CAC40 .FCHIwas down 0.1 percent, shrugging off upbeat corporate updates from Alcatel Lucent (ALUA.PA), Technip (TECF.PA) and Renault (RENA.PA).

Britain's FTSE 100 was down 0.5 percent .FTSE, and U.S. futures pointed to Wall Street opening around 0.2 percent lower.

British bank Barclays (BARC.L) set aside 500 million pounds ($800 million) for potential fines resulting from a global foreign exchange investigation. Its shares were up 1 percent, however, after the bank reported a 15 percent rise in third- quarter profit. [ID:nL5N0SP18X]

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS fell 0.5 percent, while Japan's Nikkei .N225 bucked the trend in Asia and rose 0.7 percent, as investors took heart from the significantly weaker yen.

Gold fell to a three-week low just above $1,200 an ounce XAU=, pressured by the strong dollar. Oil also fell, with U.S. and Brent crude futures down almost 1 percent to $81.40 and $86.42 a barrel, respectively CLc1 LCOc1.

Brazil surprised markets late on Wednesday by hiking interest rates, a bold move that signals President Dilma Rousseff may make market-friendly policy changes after her narrow re-election victory on Sunday. [ID:nL1N0SO0TA]

The rate hike could give the Brazilian real BRL= a further lift. It had fallen to a nine-year low against the dollar on Monday after Rousseff defeated market-friendly challenger Aecio Neves, but it recovered ground as some of the pessimism faded.

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