Dollar slips and ASX rallies as US Fed lifts interest rates

The Australian dollar slipped and shares rose on Thursday after the US Federal Reserve raised interest rates for the first time in almost a decade, ending months of speculation about the central bank’s view of the world’s biggest economy.

The move – one of the most telegraphed in the history of central bank policymaking – means the cost of money in the US will start to rise, forcing investors and traders around the world to begin repricing everything from equities, bonds and currencies to property and oil.

It follows almost seven years of interest rate cuts and more radical policy called quantitative easing, where the central bank intervenes in bond markets to hold down long-term interest rates and encourage more spending and investment by households, companies and professional investors.

After a slight dip on the news, the Australian dollar spiked to US72.80¢ as its US counterpart sold off. However, the greenback bounced back as market participants bet the tightening cycle – so-called because it makes credit harder to come by – will be more aggressive than previously thought.

In late local trade, the Aussie was fetching US71.82¢ compared with US72.07¢ at the same time on Wednesday.

Meanwhile, the Australian sharemarket also rallied, ending up another 1.5 per cent after a pre-Fed gain of 2.4 per cent on Wednesday.

The two-day rally snapped a six-day losing streak and almost made up the losses over that period.

Peak Asset Management executive director Niv Dagan​ said the Fed decision removed the “overhang and uncertainty” that had created investor angst in recent months, setting the stage for an end-of-year rally.

Sharemarkets often sell off when interest rates rise, but this hike is different because it comes from a very low base and signals that the world’s biggest economy is in good health.

That the Reserve Bank of Australia has no plans to change the cash rate from 2 per cent makes equities more attractive than bonds as well.

AMP Capital chief economist Shane Oliver said Australian rates had historically followed the US, but the two central banks had diverged recently.

“With the Australian economy on a weaker trajectory relative to its potential than the US economy, the RBA will not be following the Fed into a rate hike,” he said.

“In fact, the odds remain that the RBA will have to cut again as the mining boom continues to unwind, the contribution to growth from housing starts to peak next year and inflation remains low.”

Contango Asset Management chief investment officer George Boubouras​ said all this meant there was considerable value on offer on the local sharemarket.

“There’s just been elevated or heightening investor caution leading into the [Fed] meeting,” he said.

“For the week ahead and the month ahead, there is still good value in relative assets versus risk-free bonds and cash.

“Santa’s little helpers are back to help us through the next six days leading into Christmas.”

However, others warned that real market reaction to the Fed decision would be delayed as the decision came close to the end of the US business day and too late for London and other major European financial centres.

Commonwealth Bank of Australia’s chief currency and rates strategist, Richard Grace, said Australian shares could still sell off again and the Aussie dollar fluctuate as volatility returned to markets.

“I think we’ll see a bigger market reaction over the next 24 hours,” Mr Grace said.

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