Hawkish Fed sends US dollar soaring; bank stocks rally

Stocks on Wall Street buoyed by resulting rally in bank shares

The US dollar touched a seven-week high against major currencies on Wednesday after the Federal Reserve signalled an interest rate rise could happen as soon as June, while stocks on Wall Street were buoyed by the resulting rally in bank shares.

The Fed will likely raise interest rates in June if economic data points to stronger US second-quarter economic growth along with higher inflation and employment, according to minutes from the US central bank's April policy meeting.

Markets had earlier priced in one interest rate hike from the Fed this year, but this week's US inflation data, recent comments from several Fed policymakers, and the minutes of the last policy meeting published on Wednesday have now all led analysts to see monetary policy tightening soon.

Futures markets see the probability of an interest rate rise in June at 34 per cent, up from 15 per cent on Tuesday, and the likelihood of a July rise at 54 per cent, up from 33 per cent, according to CME FedWatch.

Bank stocks rose on Wednesday, as banks are seen benefiting from higher interest rates, while technology was the second-best performing sector, helping to reduce losses on Wall Street seen earlier in the day.

"The cyclical sectors on the stock market are doing better, so there's a bullish undertone to the idea that the Fed will finally start to normalise interest rates," said Jim Paulsen, chief investment strategist at Wells Capital Management in Minneapolis.

"I think it is high time that the Federal Reserve starts to normalise policy. We've tried this for seven years, let's try something new. If the Fed shows confidence the private sector might do the same," he said.

The Dow Jones industrial average fell 3.36 points, or 0.02 per cent, to 17,526.62, the S&P 500 gained 0.42 points, or 0.02 per cent, to 2,047.63 and the Nasdaq Composite added 23.39 points, or 0.5 per cent, to 4,739.12.

Banks also led European stocks higher. The pan-European FTSEurofirst 300 index ended up 0.82 per cent, while MSCI's gauge of stocks across the globe fell 0.12 per cent weighed by the weakness on Wall Street.

US DOLLAR RISES ON LIKELY FED RATE RISE

The US dollar index, which measures the greenback against a basket of currencies, rallied to its highest since late March on chances for an interest rate rise soon, and ended up 0.69 per cent.

The yen was down 0.99 per cent versus the greenback at 110.20 per dollar and the euro fell 0.85 per cent to $1.1215.

Crude oil futures turned lower as the dollar rose as commodities are usually priced in US dollars. Trading was volatile as investors earlier focussed on a large gasoline drawdown in US government oil inventory data and a surprise build in crude stockpiles.

US crude was down 0.9 per cent at $47.90 and Brent crude last traded at $48.56, down 1.5 per cent on the day.

US Treasury yields rose to multi-month highs on the higher rate expectations.

Benchmark 10-year notes fell 28/32 in price to yield 1.8521 per cent, up from 1.753 per cent on Monday. The yield on the 10-year Treasury note touched its highest since April 27.

"It seems like the market was in 'show-me' mode" when it comes to the Fed's interest rate expectations, Martin said.

"The action in short-term Treasuries right now is showing us that the market is starting to believe it a little bit more."

The yield for two-year Treasury notes rose to as much as 0.912 per cent, the highest since March 16. Yields on three-year notes hit 1.085 per cent, the highest since March 23.

Copper fell 1.0 per cent to $4,613 per tonne.

Spot gold was down 1.8 per cent at $1,256.76 an ounce.