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Dollar Strengthens Amidst High Expectations of Fed Interest Rate Hikes in U.S.

At the start of the market on February 24, world shares hiked to all-time highs as expectations rose that Janet Yellen, the Fed chair would continue to push for interest hikes in the world’s largest economy.

Dollar Strengthens Amidst High Expectations of Fed Interest Rate Hikes in U.S.

At the same time, the stock exchange markets in Europe traded close to a breakeven point as the euro-zone agreed to a four-month extension for Greece to implement proposed economic reforms.

A source from the European Commission reported, ‘In the view of the Commission, the list issued by Greece is adequately comprehensive. It is a valid starting point toward the successful conclusion of the review.”

Following the announcement, Greek shares hiked by 7% while Italian, Greek and Spanish bonds yields declined as tensions in the euro zone subsided.

As traders waited to hear the message from Yellen, the dollar continued to gain at unprecedented rates. The green buck gained 0.4% to 119.34 against the yen and 0.15% to $1.13 against the euro. Meanwhile, U.S. Treasury bond yields were at 2.07 percent

Yellen is set to testify before the Congress on February 24. There is a lot of uncertainty whether she will confirm the anticipated interest rate hike that had been set for June.

Chief economist at RBCM, Tom Porcelli said, “We find it difficult to imagine that Yellen will support the ‘lower for longer’ position that was present in the Fed minutes. This is given the evidence that the backdrop can significantly withstand even a modest increase in interest rates.”  He further asserted that looking at economic fundamentals, there is no need for emergency accommodation of interest rates.

 

World shares at near all-time high

At the start of the market, European shares saw the FTSEurofirst 300 index. FTEU3 make impressive gains in a new high since 2008. However, investors were cautious about making big wagers as they anticipated Yellen’s testimony.

London’s FTSE got a boost from leading miner BHP Billiton (BLT.L). The FTSE reached historic heights that were last witnessed in 1999.

Market shares in Asia also saw a bump against a growing dollar. Tokyo shares witnesses a peak that was last seen 15 years ago.

Even with a stronger dollar, the prices of oil remained steady with Brent inching down to $58.43 per barrel while U.S. crude maintained at $48.88 per barrel.

Meanwhile, GOLD, which has for a long time, been considered a safe haven slipped down lower in seven weeks. A strong U.S. economy and a strong anticipation that the Fed will increase interest rates have put a dump on gold’s appeal as a safe investment.

Barnabas Gan, a bank analyst at OCBC who predicts that gold will be at $1000 an ounce by the end of the year said, “A strong U.S. economy provides the Fed with an impetus to begin with the normalization of interest rates. This is definitely a very bearish signal for gold.”

 

Market Impact

·       It is likely that just a few sectors will respond strongly to the anticipated interest hikes. These include chemicals, construction materials and person household product industries

·       Stock returns for financial services will likely be positive. Financial stocks are primarily driven by the economy’s strength; a strong US economy will offset any deleterious impact higher interest rates may have.

·       On the contrary, defensive anti-cyclical stock may react poorly to an interest hike. A combination of a strong economy and higher interest rates dampens the performance of such stock.

 

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