Dollar gains as risk appetite improves, yields rise after Fed hike

By Shinichi Saoshiro

TOKYO (Reuters) - The dollar gained against the euro and yen on Thursday, rising after the Federal Reserve's decision to hike interest rates for the first time since 2006 lifted risk appetite and Treasury yields.

The dollar edged up 0.2 percent to 122.43 yen > after rising 0.5 percent overnight. The greenback momentarily fell to as low as 121.38 as volatility briefly followed after the Fed took a step towards normalising monetary policy late on Wednesday.

The euro slipped 0.3 percent to $1.0875 >. The common currency ended Wednesday 0.6 percent lower after going as high as $1.1013.

In a well-anticipated move the Fed raised the range of its benchmark interest rate by a quarter of a percentage point to between 0.25 percent and 0.50 percent, ending a prolonged debate about whether the economy was strong enough to withstand higher borrowing costs.

 

Fed Chair Janet Yellen emphasised that further tightening would be gradual and data dependent. That said, some market watchers saw a hawkish tone in the unanimous support Fed officials gave Yellen for the hike and the fact that their median projected target rate for 2016 remained at 1.375 percent, implying four quarter-point hikes next year.

"The Fed delivered a message with a hawkish tinge. Despite this, U.S. equities gained and the financial markets were overall calm in their reaction. The fact that risk appetite was retained was key to the dollar's strength, in addition to the rise in Treasury yields," said Masafumi Yamamoto, chief forex strategist at Mizuho Securities in Tokyo.

The Dow <.DJI> gained 1.3 percent and the S&P 500 <.SPX> rose 1.5 percent overnight. The two-year Treasury yield > touched 1.021 percent on Wednesday, its highest in five years. [.N] [US/]

Yamamoto at Mizuho Securities said the dollar is likely to receive sustained support if risk assets can extend their gains. "How emerging markets and their currencies fare will be key to gauging risk appetite after the Fed's hike," he added.

Elsewhere, commodities like crude oil resumed their price decline and hurt commodity currencies such as the Australian and Canadian dollars.

The Aussie was down 0.5 percent at $0.7195 >. The Canadian dollar fetched C$1.3804 > to the greenback, in reach of an 11-1/2-year low of C$1.3848 hit overnight.

Brent crude fell more than 3 percent on Wednesday, after U.S. government data showed a big build in crude inventories.

(Reporting by Shinichi Saoshiro; Editing by Eric Meijer)