Dollar shines, Asia shares slip after Fed signals December rate hike

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Europe market opened tad higher on Thursday as the Federal Reserve announced its plan to start unwinding its balance sheet and hinted that the Fed will be introducing another interest rate hike in the current year.

Federal Reserve Chair Janet Yellen is scheduled to speak with reporters about those decisions Wednesday afternoon, following a two-day strategy meeting in the US capital.

The problem is that interest rates, which the Fed influences through its federal funds rate, remain low even though jobs recovered years ago.

The primary beneficiary of the higher bond yields was the USA dollar, which rose to a two-month high against the Yen and sent the Euro below $1.19.

However, inflation continues to remain below 2 percent, despite increases in food and energy prices, which the Fed excludes from its calculations.

"Hurricanes Harvey, Irma, and Maria have devastated many communities, inflicting severe hardship".

With regard to the latter, it observed short-term disruption but stated that past experience suggested "that the storms are unlikely to materially alter the course of the national economy over the medium term".

He says the rebuilding efforts will add to GDP growth over the next year on net, and thus it's possible the hurricanes would make the Fed more likely to raise rates.

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The cause of the spike in the United States dollars was arguably the fact that the dot plot or perceived course of hikes from the Fed continued to expect one hike this year and three next year.

According to the CME Group's FedWatch tool, investors now see a 56 percent chance of a rate increase by the end of December, CNBC reported. Yellen said today the Fed's decision to wind down the program is a vote of confidence in the US economy. Income-seeking investors find those stocks less appealing when bond yields move up.

There is concern, too, that rates could climb faster if other central banks follow the Fed's lead and begin reducing their own bond holdings.

In the final three months of this year the Fed will reduce its holdings of US Treasury debt and mortgage-backed securities by $10 billion a month, and every three months will reduce it by an additional $10 billion a month until the rate hits $50 billion a month in October 2018.

As it did in June, the Fed continues to lean toward one more rate hike in 2017 and three more in 2018; however, the average year-end targets for the fed funds rate are slightly lower.

While some analysts are looking ahead to interest rate projections for 2020, it is worth noting that it is unclear who will be leading the Fed at that time. With four rate rises pencilled in over the next 15 months, the Fed could be finished the bulk of its increases by the end of next year.

The Fed's plan to tighten policy comes despite subdued inflation that has been running below the central bank's annual 2% target.

Minutes from the July meeting showed deepening worries about a prolonged period of low inflation.