European shares have surged after the US central bank increased interest rates for the first time since 2006.

The UK’s FTSE 100 index rose 1.1%, while the main share indexes in France and Germany saw even bigger increases.

The dollar also rallied against other currencies after the US Federal Reserve increased the range for its benchmark rate to between 0.25% and 0.5%.

The Fed said the rise was part of a “gradual” process to get rates back to normal after years of being near zero.

By early afternoon, London’s FTSE 100 was up 1.1% at 6,125.82, while Frankfurt’s Dax jumped more than 3% and the Cac 40 in Paris was 2.1% higher.
‘Christmas has come early’

Stocks on Wall Street opened little changed, having recorded big rises on Wednesday after the Fed’s announcement.

The Dow Jones rose 1.3% on Wednesday, but shortly after trade began on Thursday it was down 5 points at 17,744.04.

“With the Dow rising steadily from the moment [Fed chairwoman Janet Yellen] first opened her mouth, the rosy picture she painted of the US economy and the absence of major overseas threats has sent markets surging with relief,” said Robert Craig, private client investment manager at MB Capital.

“In a press conference that was short on precision and long on pragmatism, the Fed left the door wide open to future changes in direction.”

“But what is clear is that there will be no sudden spiral of further rate rises – and for stocks, Christmas has come early.”

This could help pave the way for a so-called Santa rally, where stocks rise in the run-up to the end of the year.

“With the Fed out of the way and only a couple of trading sessions left before Christmas, we could now see a traditional end-year rally,” said Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets in Brussels.

Carmakers, banks and insurers – stocks which do well when an economy is growing – rose.
‘No nasty surprises’

On the currency markets, the dollar rose against larger major currencies following the Fed’s decision.

Higher rates make the US a more attractive market for deposits, meaning demand for the dollar is likely to rise.

The pound fell by about three-quarters of a cent against the dollar to $1.4936.

British government-issued bonds, or gilts, rose in price following the Fed decision, meaning lower yields, or income.

Benchmark ten-year gilt yields fell 0.056 percentage points to 1.89%. While the spectre of higher rates is often bad for existing debt prices, analysts said investors were pleased future Fed rate rises would be “gradual” in nature.

“Overall, there were no nasty surprises in there – the Fed sounded quite dovish, data-dependent, so I think fixed income markets were quite happy with it,” Jason Simpson, fixed income strategist at Societe Generale.

Image copyright AP Image caption The Fed’s move had been widely expected

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