FX Focus: Euro plunges to 14-year low versus dollar as Fed hikes interest rates

The dollar surged to a 14-year high on Thursday (15 December), after the US Federal Reserve hiked interest rates for only the second time in a decade the previous night.

The dollar index, which measures the currency's strength against a basket of currencies, hit its highest level since 2003 as the greenback hit a record high against the Turkish lira, an eight year high against the Chinese yuan.

Halfway through the morning session, the euro was 0.58% lower against the greenback, trading at $1.0427, as the latter reached the highest level against the common currency since January 2003. The dollar made modest gains against the pound, rising 0.08% to 0.7983p.

FXTM chief market strategist Hussein Sayed said the latest dollar rally was a significant milestone in the greenback's quest to reach parity with the euro.

"Euro/dollar today made its first attempt to test the key support level at $1.0460, and if the pair succeeded in breaking below, we expect to see a sharp selloff as many stop losses are placed below this key level and the parity could then become a matter of time," he said.

The dollar gained across the board, surging 1.09% against the yen to ¥118.32 and gaining 0.26% against both its Canadian and Australian counterparts, to CAD$1.3316 and AUD$1.3530.

The gains came as Fed members unanimously voted to raise interest rates by a quarter of a point, 12 months since it hiked rates for the first time in nine years, and predicted it would raise interest rates three times in 2017, up from the two hikes predicted in September.

Following the announcement, Bloomberg's Fed probability calculator had the chances of a third hike in 2017 at 48%, 9% higher than on Tuesday. However, while the rate hike was considered a certainty, the markets seemed to have been surprised by Fed chairwoman Janet Yellen's decision to not adapt a softer stance.

"This is flat out hawkish, and the US dollar is reacting accordingly,"said Oanda's senior trader Stephen Innes.

"I thought we would be calling the Yellen bluff this morning, as the market had expected at most a subtle shift in Fed language. However, the Fed's forward guidance is in reaction to Trumpflation as Yellen did little to quell the markets' pent up the view that both growth and inflation will accelerate in 2017."

Kathleen Brooks, research director at City Index, added the market now expects the Fed to move faster than forecast.

"The view seems to be that Trump will deliver on his fiscal stimulus promise, the economy will expand sharply, inflation will rise and the Fed will need to hike rates more than currently forecast, but not by enough to lead to a serious stock market sell-off," she explained.

"The market is fully embracing Trumpenomics, which is bad news for emerging markets with dollar-denominated debts, it also signals the beginning of the end of the low interest rate environment."

Meanwhile, the pound was up 0.19% against the euro to €1.1944 ahead of the last Bank of England's meeting of 2016, during which Britain's central bank is expected to keep interest rates unchanged at 0.25%.