NEW YORK (MarketWatch) — The dollar spiked against the euro and yen Wednesday after Federal Reserve Chairwoman Janet Yellen said the lag time between the end of the Fed's bond-buying program and the first rate hike could be about six months, suggesting a first step in monetary tightening could happen as soon as the spring of 2015.
Getty Images Fed Chairwoman Janet Yellen That's sooner than market participants had expected, said Greg Anderson, global head of foreign-exchange strategy at BMO Capital Markets.
The dollar (USDJPY) jumped to ¥102.47 from ¥101.41 late Tuesday. The euro (EURUSD) dropped to $1.3830 from Tuesday's level of $1.3932.
The Fed said Wednesday it would reduce its monthly bond purchases by another $10 billion, in line with expectations. The central bank also changed the way it expresses how long it plans to keep interest rates low, adding that it will now consider a "wide range" of factors instead of focusing on the 6.5% threshold in the unemployment rate.
Yellen's response in the press conference elaborated on the Fed statement, which said the bank would wait "a considerable time" before hiking rates.
The dollar also rallied in the wake of the Fed statement. "The Fed did not take the dovish evolution that most people expected as they dropped the 6.5% threshold," said Anderson. Short-term interest rates are now expected to rise slightly faster than as dictated by previous forecasts. Read: Fed shifts criteria for rate hike and market sours
Treasury yields surged Wednesday.
The ICE dollar index (DXY) , a gauge of the currency's strength, rose to 80.001 from 79.389 on Tuesday. The WSJ Dollar Index (XX:BUXX) , an alternate measure that pits the dollar against more rivals, gained to 73.57 from 73.01.
"The tone of the statement and the updated staff projections (mainly on the appropriate timing of policy firming) sounds more hawkish than expected," said analysts at Newedge Strategy in a note. "The great majority of FOMC members now sees Fed Funds to start rising in 2015 and the target for Fed Funds at the end of 2015 is now clearly centered at 1%."
The pound (GBPUSD) fell to $1.6536 from $1.6589 on Tuesday. The pound had strengthened earlier after an improvement in monthly U.K. jobs figures. The Office for National Statistics said the number of people claiming unemployment benefits fell by 34,600 in February, from January. The figure outstripped projections of a 25,000 drop.
In a flurry of activity for the U.K. markets Wednesday, the statistics office also said the unemployment rate was unchanged at 7.2%, meeting expectations. Separately, minutes from the Bank of England's meeting earlier this month showed all nine members of the Monetary Policy Committee voted in favor of keeping policy unchanged.
The benchmark interest rate currently stands at a record low of 0.5% and bank purchases of government bonds remains at 375 billion pounds ($622 billion). The U.K.'s finance minister also outlined his annual budget on Wednesday.
Meanwhile, the Australian dollar (AUDUSD) fell to 90.40 U.S. cents from 91.28 U.S. cents late in the previous session.
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