London - The dollar hit three-week highs against a basket of currencies and stocks and bonds fell across the globe on Thursday as investors positioned for a speedier rise in US interest rates than previously thought.
Global stocks as measured by the MSCI world equity index dropped 0.9 percent after Federal Reserve Chair Janet Yellen said on Wednesday the US central bank might end its bond-buying programme this autumn, and could start to raise interest rates around six months later.
Combined with a slight rise in the projected path for rates by Fed members, that led the market to bring forward the likely timing of the first hike in US rates by a couple of months.
European stocks dropped 0.8 percent on Thursday, following losses of more than 1.5 percent in Japan and Asian markets.
US stock index futures pointed to a lower start on Wall Street, after declines there on Wednesday .
Yellen sought to use her news conference to emphasize that rates would stay low for a while and rise only gradually, but the message was lost on skittish markets.
“This is triggering a real correction in interest rates forecasts, with ripple effects hitting virtually all asset classes, from equities to forex,” said David Thebault, head of quantitative sales trading, at Global Equities.
Yellen's words led the futures market for the U.S. Fed funds rate to shift to pricing in around a 50-50 chance of the first hike in May to June next year. The timing had been July to August beforehand.
Yet many were not convinced the timetable had moved much at all. A Reuters poll of 17 primary dealers found 10 still expected the first hike to come in the second half of 2015, and four were still tipping 2016.
The whiplash was felt most in the short end of the Treasury market which is more sensitive to the course of the Fed funds rate. Yields on two-year notes shot up 8 basis points on Wednesday to 43 basis points, the sharpest single-day rise since mid 2011, and stayed around that level on Thursday.
Yields on 10-year notes were at 2.77 percent, having risen 9 basis points on Wednesday. German 10-year Bund yields, the benchmark for euro zone borrowing costs, rose 6 basis points.
But five and 15-year borrowing costs of euro zone peripheral state Spain fell to their lowest at auction since the economic crisis began, as yield-hungry investors brushed off U.S. rate rise prospects.
The rise in US yields lifted the dollar, however, to a three-week high of 80.285 against a basket of currencies
The euro dropped half a percent to a two-week low of $1.3760, extending Wednesday's losses, and the dollar rose slightly to 102.45 yen, having jumped a full yen on Wednesday.
The dollar's gains were gold's undoing, sending the metal down to three-week lows of $1,321.34 an ounce.
The prospect of rising rates in the United States has not been good for some emerging markets as it threatens to draw capital away, pressuring equities and currencies.
Emerging stocks fell more than 1 percent on Thursday to the week's lows, within sight of their worst level in six weeks.
Russia's stocks fell, undoing some recent gains on a positive reception this week to President Vladimir Putin's address to parliament, as European Union leaders meet.
European leaders will show they are ready to ramp up punitive measures against Russia, including politically sensitive economic sanctions, Chancellor Angela Merkel told the German parliament.
U.S. rate rise expectations come as China seems to be weakening its yuan as a way to support a slowing economy, which puts pressure on other nations in the region to lower their currencies to stay competitive on exports.
The yuan skidded to its lowest in a year at 6.2275 per dollar, and was set for its largest weekly loss in at least 20 years
Last weekend, the People's Bank of China (PBOC) doubled the daily trading band allowed for the yuan to 2 percent from the mid-point that it sets each day.
In oil markets, Brent futures was down 16 cents to $105.62 per barrel after hitting six-week lows, while U.S. crude oil dropped 37 cents to exactly $100.