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Pound tumbles as Fed triggers surge in dollar

Janet Yellen said the Federal Reserve was operating under a "cloud of uncertainty" after Donald Trump's election win
Janet Yellen said the Federal Reserve was operating under a "cloud of uncertainty" after Donald Trump's election win / Nicholas Kamm/AFP/Getty Images
15 December 2016

he pound was crushed by a rampant dollar today as the prospect of more rate hikes from a newly hawkish US Federal Reserve reverberated through the world’s financial markets.

Sterling slipped nearly two cents against the greenback to a low of $1.2509 at one stage as traders reacted to the Fed’s interest rate rise to 0.75%, only its second rise in a decade.

Against a global basket of currencies, the dollar is at a 14-year high.

Forecasts of three more moves to come in 2017 from US rate-setters contrasted with the Bank of England, which held interest rates unchanged today at just 0.25%.

Threadneedle Street is not expected to budge for at least two years while Brexit negotiations cast a shadow over the UK economy.

CMC Markets analyst Michael Hewson said: “What has become clearer is that the policy divergence that has been in place between the Fed and other central banks has just got bigger, and this is likely to put further upward pressure on the US dollar.”

Although chairman Janet Yellen said the Fed was operating under a “cloud of uncertainty” following Donald Trump’s election win, the forecasts from the world’s most powerful central bank accelerated a rout in bond markets begun by the President-elect’s spending pledges.

The Fed’s closely watched “dot-charts” showed 11 of its 17 voting rate-setters expecting three hikes next year.

That triggered a widespread bond sell-off as US Treasuries yields, which move in the opposite direction to prices, rose while the Government’s benchmark cost of borrowing jumped 10 basis points to 1.481%, the highest since May.

European debt, including German bunds, also sold off along with traditional safe-haven gold and the Japanese yen, which sank to a 10-month low against the dollar. The euro hit a 21-month low of $1.0468 at one point.

Some experts expressed scepticism over whether the Fed would follow through on its forecast after it originally predicted four rate hikes for this year 12 months ago: “We started 2016 with the Fed in a similar bullish mode and events robbed them of the ability to raise rates more than once.”

Rising UK gilt yields also put pressure on Chancellor Philip Hammond’s borrowing targets.

Meanwhile, sharply rising swap rates, which help determine the price of fixed-rate home loans, could feed into higher mortgage costs despite the Bank of England’s record low bank rate, unless lenders decide to take a hit on their margins.

Kathleen Brooks, research director at City Index, said the Fed’s stance was “the beginning of the end of the low interest rate environment”.