U.S. dollar up on hawkish Fed; bank stocks rally

By Rodrigo Campos

NEW YORK (Reuters) - The U.S. dollar rose sharply against a basket of currencies on Wednesday after the Federal Reserve signalled an interest rate hike could happen as soon as next month, while stocks on Wall Street fell despite a rally in bank shares.

The Fed will likely raise interest rates in June if economic data points to stronger second-quarter growth as well as firming inflation and employment, according to minutes from the U.S. central bank's April policy meeting.

Earlier this week, markets had priced in one interest rate hike from the Fed likely late in the year. This week's U.S. inflation data and a more hawkish tone from several Fed policymakers led analysts to now see the Fed more willing to tighten monetary policy, as confirmed by the minutes.

 

Markets see the likelihood of an interest rate rise in July at 50 percent, up from 33 percent Tuesday, according to the CME FedWatch tool. The June likelihood sits at 34 percent, up from 15 percent.

Bank stocks, seen benefiting from higher interest rates, led gains on Wall Street, while the high-dividend paying stocks like utilities and consumer staples weighed on the S&P 500 the most.

The Dow Jones industrial average <.DJI> fell 100.66 points, or 0.57 percent, to 17,429.32, the S&P 500 <.SPX> lost 11.44 points, or 0.56 percent, to 2,035.77 and the Nasdaq Composite <.IXIC> dropped 8.46 points, or 0.18 percent, to 4,707.28.

Banks also led European stocks higher. The pan-European FTSEurofirst 300 index <.FTEU3> ended up 0.82 percent, while MSCI's gauge of stocks across the globe <.MIWD00000PUS> fell 0.64 percent as Wall Street sharply cut gains after the Fed minutes.

The dollar index <.DXY>, which measures the greenback against a basket of currencies, rallied to a session high after the minutes. It was last up 0.60 percent.

The yen > was down 0.69 percent versus the greenback at 109.87 per dollar and the euro > fell 0.79 percent to $1.1222.

Crude oil futures turned lower as the dollar rose. Trading was volatile as investors earlier focussed on a large gasoline drawdown in U.S. government oil inventory data and a surprise build in crude stockpiles.

U.S. crude was recently down 0.5 percent at $48.08 and Brent crude last traded at $48.79, down 1.0 percent on the day.

U.S. Treasury yields rose to multi-month highs on the higher rate expectations.

Benchmark 10-year notes > fell 28/32 in price to yield 1.8678 percent, up from 1.753 percent on Monday.

Copper fell 0.5 percent to $4,634 per tonne.

Spot gold > was down 1.4 percent at $1,262.31 an ounce.

(Reporting by Rodrigo Campos, additional reporting by Sam Forgione and Tanya Agrawal; Editing by Nick Zieminski)