Dollar soars on Fed talk as stocks smash records

The dollar surged Wednesday as investors bet on an early Federal Reserve interest rate rise while stock markets set new record highs, encouraged by a Donald Trump speech that, although short on detail, at least did no major damage to hopes for big US spending, analysts said.

Traders now put the chances of a rise in US interest rates this month at around 80 percent after two top Federal Reserve officials suggested that an early hike was on the cards.

Higher interest rates would make holding dollar-denominated assets more attractive, stoking demand for the greenback.

"The dollar is kicking some serious butt," tweeted Mati Greenspan, Senior Market Analyst at eToro.

Higher rates also improve the profitability of banks, long suffering from low rates, and gains in financial sector shares were indeed a driving force behind Wednesday's equity strength.

"With investors in exuberant spirit, Fed policymakers talking up the chance of a March rate hike is boosting banks stocks without hurting other sectors," said Jasper Lawler at London Capital Group.

- 'Bullish outlook' -

"Essentially the fundamental outlook remains bullish for the greenback since no other major central bank is even close to rising rates," said Fawad Razaqzada, Market Analyst at Forex.com.

But he cautioned that there are hurdles, notably an upcoming US jobs report and a speech by Fed chief Janet Yellen, before a March hike should be considered as being in the bag.

Investors shifted into the US unit after New York Fed president William Dudley said there was a strong case for borrowing costs to rise, while his San Francisco counterpart John Williams expects such a move to get "serious consideration" when the bank meets this month.

The Fed's key committee, the FOMC, next meets on March 14 and 15.

Trump's much-anticipated address to both houses of Congress was short on detail but provided enough to keep traders upbeat, although some marvelled at markets' patience with Trump.

- 'Talk, no action' -

The tycoon pledged $1.0 trillion in public-private infrastructure spending and "massive" tax cuts for the middle class, but he did not say how any of it would be paid for.

"It's difficult to say how long they will be willing to tolerate so much talk and no action but for now at least, it appears investors have faith in him to deliver even if it's going to take longer than planned," said Craig Erlam at Oanda.

"Equities are embracing a more presidential Trump whose congressional address offered just enough to rekindle bullishness," said Mike van Dulken, head of research at Accendo Markets.

Falls in the pound and the euro against the dollar were "helpful" to European markets, boosting the competitiveness of exporting companies, he said.

- Smashing records -

London's FTSE 100 index smashed previous records to set a new intraday peak of 7,783.05 and also a fresh closing high.

Key continental European markets were up two percent or more at the closing bell, with Frankfurt going above 12,000 for the first time, also setting a new closing record.

The Dow Jones index resumed its bullish stance, having paused Tuesday after 12 consecutive record-breaking sessions.

It went above 21,000 for the first time Wednesday, only a month after piercing 20,000, which at the time already seemed like an improbable feat.

The euro took a small additional hit when French presidential candidate Francois Fillon announced that judges had summoned him to press charges over an expenses scandal but vowed to continue his campaign, adding to already substantial uncertainty in the run-up to the poll in April and May.

Fillon's stance "raises the likelihood of a period of unstable government in France after this spring's elections", said Jessica Hinds at Capital Economics.

- Key figures around 1640 GMT -

London - FTSE 100: UP 1.6 percent at 7,382.90 points (close)

Frankfurt - DAX 30: UP 2.0 percent at 12,067.19 (close)

Paris - CAC 40: UP 2.1 percent at 4,960.83 (close)

EURO STOXX 50: UP 2.0 percent at 3,384.70

New York - Dow: UP 1.2 percent at 21,068.90

Tokyo - Nikkei 225: UP 1.4 percent at 19,393.54 (close)

Hong Kong - Hang Seng: UP 0.2 percent at 23,776.49 (close)

Shanghai - Composite: UP 0.2 percent at 3,246.93 (close)

Euro/dollar: DOWN at $1.0568 from $1.0579

Pound/dollar: DOWN at $1.2326 from $1.2440

Dollar/yen: UP at 113.66 yen from 112.70 yen

Oil - Brent North Sea: UNCHANGED at $56.51 per barrel

Oil - West Texas Intermediate: DOWN 1 cent at $54.00

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