World shares rose back towards all-time highs and a slump then jump in the dollar triggered wild moves in currency markets on Thursday, as investors priced in a later start and a slower pace for future U.S. rate rises.
European shares opened up 0.4 percent .FTEU3 with London's FTSE .FTSE hitting a new record peak after Asian bourses had enjoyed their best session in 18 months overnight. [.N]
The shift in rate expectations had hit the dollar .DXY hard at first, though it had repaired almost all of the damage as trading gathered momentum in Europe.
The euro found itself as high as $1.10625 EUR= in turbulent trade late on Wednesday, but was back down at $1.0683 as markets also began to focus on what are expected to be difficult talks on Greece later.
Short-term U.S. yields boasted their biggest drop in six years after the Federal Reserve trimmed forecasts for inflation and growth, and said unemployment could fall further than first thought without risking a spike in inflation.
The median projection for the Fed funds rate at the end of 2015 was cut to 0.625 percent, down half a point from December.
Fed Chair Janet Yellen also sounded uncomfortable with the strength of the dollar, saying it would be a "notable drag" on exports and a downward force on inflation.
"They (Fed) are still on course to raise rates, but they will do that at a more gradual pace over the years ahead," said Lee Hardman, an FX strategist at Bank of Tokyo Mitsubishi.
"A lot of people were looking for more attractive levels to buy the dollar after the recent strong moves, and the meeting provided that, so the rebound now makes perfect sense."
The market reaction was immediate and dramatic to Yellen's comments. Fed fund futures surged as investors sharply scaled back expectations for how fast and far rates might rise.
The December contract rocketed to 99.59, implying a rate of 41 basis points and reversing the impact of the last two payrolls reports. Yields on two-year notes US2YT=RR peeled off a huge 12 basis points to 0.55 percent although had clawed back up to 0.58 in Europe.
RATTLED DOLLAR
The U.S. Treasury rally rippled out to other bond markets, driving short-term yields from Australia to Germany to new all-time lows. [GVD/EUR]
The Fed's seeming caution on hikes rattled the dollar as investors have been massively long in the expectation its interest rate advantage could only get wider.
But as markets settled, buyers began to return in droves. By 0900 GMT, against a basket ofcurrencies, the dollar was almost back to where it was before the Fed comments as the euroEUR=, the yen JPY=, sterling GBP=D4 all gave back ground. [FRX/]
The Swiss franc strengthened after its central bank decided against moving interest rates deeper into negative territory while euro traders were eyeing how much money the ECB would shovel into markets in its first TLTRO since starting QE.
Emerging market assets were also cheered by the Fed's soothing message on potential future rate moves. Most Asian emerging currencies jumped with China's yuan hitting a two-month high and MSCI's main EM stock index up 1.3 percent .MSCIEF at a three week high. [EMRG/FRX]
MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS climbed 1.6 percent, its largest daily gain since September 2013. Australia's main index .AXJO jumped 1.9 percent led by banks as markets wagered on lower domestic rates.
The only laggard was the Nikkei .N225 which slipped 0.2 percent in reaction to a firmer yen.
Among commodities, gold sagged to $1,164 an ounce XAU= in Europe having climbed from $1,145 on Wednesday.
U.S. crude CLc1 was off 86 cents at $43.80, though that followed a gain of 3 percent on Wednesday. Brent LCOc1 was 66 cents easier at $55.26 a barrel.
Join the Conversation