Dollar hits seven-week high after Warsh's first Fed hike

Summary

The dollar climbed to seven-week highs after Kevin Warsh delivered the Fed's first rate rise in more than three years, backed unanimously by his colleagues. Short-dated Treasury yields reached their highest since mid-2024, while the 10-year yield eased below 5% as investors welcomed a firmer line on inflation. Goldman Sachs now expects a follow-up hike in October, with futures pricing three more. Asian shares firmed and European and US futures pointed higher.

Equities

The FTSE 100 closed 0.3% higher at 10,688.47 on Wednesday, while the FTSE 250 jumped 1.1% to 24,070.20. Housing and construction shares led the gains as British government bond yields fell sharply, with the two-year gilt yield touching 4.752%.

Barratt Redrow jumped nearly 12% on Wednesday, its biggest one-day percentage gain in almost six years. Britain’s largest homebuilder reported an improving reservation rate, a strong order book and profit ahead of forecasts, helping the FTSE 350 household goods and home construction index rise 7%.

Moonpig fell 1.2% on Wednesday despite maintaining its annual outlook. Analysts pointed to concerns about consumer spending and profit-taking in the greeting card retailer’s shares.

In the US, stocks closed mostly lower on Wednesday after the Federal Reserve raised its key interest rate for the first time in more than three years. The Dow Jones Industrial Average fell 1.21% to 51,461.78, the S&P 500 dropped 0.44% to 7,552.14 and the Nasdaq Composite slipped 0.01% to 25,978.43.

Energy shares were among the biggest fallers as crude prices declined. Chevron closed 2.9% lower and Exxon Mobil dropped 3.5% on Wednesday, while Devon Energy and ConocoPhillips each lost more than 5%.

Intel jumped 4.0% on Wednesday after a report that South Korea’s SK Hynix was in talks with the chipmaker about manufacturing memory chips in the US. IBM fell 4.4% after announcing that its chip unit, Anderon, had signed a funding agreement with the US government.

Boeing slid 3.7% on Wednesday after chief executive Kelly Ortberg said stabilising 737 MAX production at 47 aircraft per month was taking longer than expected. Robinhood dropped 5.5% after the US Senate failed to advance major cryptocurrency legislation, while the company was also in focus after two former engineers were charged with insider trading and misuse of confidential information.

Forex & Commodities

The US dollar held near a seven-week high early on Thursday after the Federal Reserve raised interest rates and signalled further tightening. The dollar index traded at 100.3, while the euro fell to $1.146 and sterling was little changed at $1.337 ahead of the Bank of England’s policy decision.

The Japanese yen weakened to 156.0 per dollar early on Thursday, near a two-week low, before the Bank of Japan’s decision on Friday. The Australian dollar rose to $0.7111 after the IMF said Australia may require further interest-rate increases to contain inflation, while the New Zealand dollar strengthened to $0.5725.

The Fed raised rates on Wednesday, with new chair Kevin Warsh joining the unanimous decision and officials projecting another increase before the end of 2026. Futures markets subsequently priced around a 90% probability of another quarter-point increase by year-end.

The Bank of England is expected to leave rates unchanged on Thursday, with investors watching for indications that higher energy prices could prompt tighter policy. The Bank of Japan is expected to raise rates to a 31-year high on Friday and signal that further increases remain possible.

Spot gold rose early on Thursday, climbing to $4,295 an ounce after touching a near six-week low on Wednesday. The recovery came as investors assessed the Fed’s rate increase and its signal that additional tightening is likely.

Oil prices fell on Wednesday as Saudi Arabia offered additional crude supplies through Oman, easing concerns over disruption to Middle Eastern exports. Brent crude closed 2.7% lower at $105.8 a barrel, while US West Texas Intermediate fell 3.2% to $102.4. Saudi Arabia increased supplies through Oman after strikes disrupted its East-West pipeline and suspended loadings from the Red Sea port of Yanbu.