A turbulent week saw the U.S. dollar climb to a new 14-year high following signals from the Federal Reserve that it would be aggressive in raising interest rates next year. As expected, the Federal Open Market Committee on Dec. 14 increased official borrowing costs from 0.25% to 0.50%, with a target range of 0.50% to 75%, but surprised markets by signaling three interest rate rises in 2017, rather than the two increases suggested at the FOMC's meeting in September.
Janet Yellen, Fed chair, said the rate rise was a "reflection of the confidence we have in the progress the economy has made, and our judgment that that progress will continue." Markets are now factoring in a 45% chance of the Fed raising interest rates at least three times next year, and an almost 77% likelihood of at least two increases. Ahead of the U.S. presidential election, the chance of three interest rate rises in 2017 was assessed at just 5%.
Measured against trade-weighted currencies, the dollar has reached its highest level since 2002, and the euro is sliding toward parity with the dollar. The U.S. currency is now at a 10-month high against the yen. Emerging market currencies came under pressure, although they appeared to have found a floor by the end of the week.
LIBOR for three-month dollar loans, which is the global benchmark interest rate, is approaching 1.0% for the first time since 2009. The dollar LIBOR was barely 0.6% at the start of this year but has soared during the past six months.
The likelihood of higher interest rates has led to lower bond prices, leaving yields at multiyear highs. Much of the recent increase is linked to the expected fiscal policies of President-elect Donald Trump.
Before the Fed's announcement, oil prices had reached a 17-month high, with Brent Crude climbing above US$57 per barrel Dec. 12, compared with less than US$30 per barrel in January. Oil subsequently retreated, despite a bullish announcement by the International Energy Agency. The energy forecaster said it expected demand for oil to outstrip supply over the next six months provided OPEC's latest production-cutting deal can be implemented. If so, the IEA expects to see a significant reduction in oil stockpiles.
The surging dollar and higher interest rates took a heavy toll on gold, which closed at US$1,132 per ounce Dec. 16, down 2.8% over the week. The price of most mined metals also suffered, although iron ore (62% Fe) improved 2.1% for a second consecutive week to reach US$81.3 per tonne, helped by Trump's plans for heavy expenditure on U.S. infrastructure.