The euro shot higher to a five-week high and eurozone stocks sank yesterday after the US Federal Reserve adopted a dovish position on rate hikes.
Having touched $1.10 last week, the euro shot above $1.13 during European trading as investors in the eurozone got their first chance to react to the Fed paring back its expectations on rate increases in 2016 by about a half percentage point to 0.9%.
That implies two rate increases instead of the four it had signalled in December, when the Fed raised interest rates for the first time in almost a decade.
The prospect of fewer rate hikes weakened the dollar, and the euro soared to a five-week high at $1.1342.
The stronger euro weighs on the share prices of eurozone exporters because it makes their goods more expensive for buyers using weaker currencies, which in turn dents demand.
Across Europe, Frankfurt’s DAX 30 fell 0.9% at 9,892.20, while Paris’ CAC 40 edged 0.5% lower at 4,442.89.
The Euro Stoxx 50 was down 1.0% at 3,032.26.
Meanwhile London managed a gain of 0.4% to close at 6,201.12 points after the Bank of England keeping its key rate on hold at a record low 0.50% as expected.
“European markets lost ground on Thursday with banking shares as well as top European exporters leading declines after the Federal Reserve stood pat and kept US interest rates unchanged,” said analyst Jasper Lawler at CMC Markets.
Meanwhile Wall Street pushed higher, as a weaker dollar boosts US exports.
The Dow Jones Industrial Average was up 0.8% in midday trading.
“The rapid appreciation of the euro has the potential to hurt eurozone exporters which have benefited from its weakness,” said Oanda analyst Craig Erlam.
Europe’s main stock markets also beat a retreat yesterday as investors took the opportunity to take profits following recent bumper gains.
“Profit-taking is pushing markets lower and in addition many traders are of the opinion that they will be able to buy stocks cheaper in the not so distant future,” noted trader Markus Huber at City of London Markets.
“Many fund traders loaded up heavily on stocks in anticipation of these major central bank meetings and now have begun unloading by cashing in on some of the profits,” he told AFP.
The biggest faller in Frankfurt was German airline Lufthansa, whose share price slumped more than 5% despite news of soaring 2015 profits.
It ended the day down 4.6% at €14.59.
Asian equities moved sharply higher yesterday as Fed chief Janet Yellen lowered expectations for US interest rate hikes this year.
In a statement following the Fed’s latest policy meeting, Yellen cited concerns about the impact on the US economy of recent turmoil in global markets, weakness in China and Europe, and the plunge in crude prices.
Her comments came after the central bank cut its outlook for US growth for this year and painted a picture of the economy that was less upbeat than many had expected.
Crucially it forecast a slower pace of interest rate rises than foreseen in December, when it announced its first hike in almost a decade.
Yellen said policymakers had opted for “a slightly more accommodative path” given “soft” US business investment and weak exports in recent months.
The prospect of rates staying at ultra-low levels for some time boosted US shares.
Huber added that the Fed had “assured markets that ... rates won’t go up any time soon, which provides certainty” for investors.