European stock markets cling to Fed-sparked gains

Logo of the London Stock Exchange. (AFP Photo/Ben Stansall)

Frankfurt, Paris and London were slightly ahead at the European close, while Wall Street was steady approaching midday in New York.

The Fed's rate hike and its indication of three more next year - instead of the expected two - lit a fire under the dollar, pushing it to a 14-year peak against the euro, and under global stocks.

The European single currency however clambered back above US$1.04 on Friday.

The euro had slumped on Thursday to US$1.0367 - the lowest level since January 2003 - as investors were attracted by the hawkish Fed stance.

"European equities are taking a pause for breath after the recent rally but the outlook looks pretty encouraging," said Nick Stamenkovic, independent market strategist at consultancy NFS Macro.

PARITY 'QUITE POSSIBLE'

Dealers said the greenback will remain well supported if US President-elect Donald Trump delivers on his pledges for huge spending on infrastructure, tax cuts and deregulation.

Looking ahead to next year, some experts believe the euro could reach dollar parity with elections on the horizon in France and Germany - the eurozone's two biggest economies.

"A more hawkish Fed guarantees the dollar remains the currency to own," said Lee Wild, head of equity strategy at stockbroker Interactive Investor. "If Trump delivers promised fiscal stimulus it will remain so in 2017, too.

The US central bank's policy-setting Federal Open Market Committee voted unanimously on Wednesday to increase the key federal funds rate to a range of 0.5 to 0.75 per cent, as expected.

Fed chair Janet Yellen declared the rate rise was a vote of confidence in the world's biggest economy.

However, some market participants sounded a cautious tone.

"There's a wariness as to just how many interest rate hikes we will see next year," noted Jamieson Blake, retail sales manager at ADS Securities. "After all, at this time last year Yellen was suggesting we would see four quarter-point moves in 2016."

The dollar has been on a roll since Trump was elected president on Nov 8, promising huge spending. That has also sent US equity markets to record highs this month.

At the same time, the prospect of higher borrowing costs has rattled trading floors in Asia, with emerging market stocks and currencies suffering as dealers pull out looking for better returns in the US, where 10-year Treasury yields are at two-year highs.