December 15, 2016 / 12:50 PM / 9 months ago

FOREX-Fed effect smashes euro to 14-year low as dollar soars

(Updates after the start of European trading)

* Euro skids to 14-year low close to $1.04

* Dollar hits 14-year high after Fed ups rate hike projections

* Dollar/yen on track for best quarter in over 20 yrs

* Graphic: World FX rates in 2016 tmsnrt.rs/2egbfVh

By Jemima Kelly

LONDON, Dec 15 (Reuters) - The euro skidded over 1 percent to its lowest levels in 14 years on Thursday, as the dollar soared across the board, opening up the possibility that the single currency could reach parity with the greenback in the coming months.

The single currency’s break below its 2015 lows came after the U.S. Federal Reserve hinted that interest rates could rise faster in 2017 than investors had been anticipating.

The euro had managed to stay above those levels in Asian and early European trading but took another lurch lower as dealers arrived at their desks in New York. Just after 1200 GMT, it hit as low as $1.04055, down 1.2 percent on the day, leaving it around 2.5 cents lower than before the Fed statement late on Wednesday.

A 25-basis point rate hike also announced by the Fed had been widely expected by financial markets; it was its signal that rates were likely to rise three times in 2017 - up from twice at the Fed's September meeting - that investors latched onto and drove the greenback higher. tmsnrt.rs/2gsUVwB

“This has been something that the market hadn’t expected. We hadn’t expected a hawkish message from the Fed and we hadn’t expected this kind of dollar strength either,” said Barclays currency strategist Hamish Pepper, in London.

“Our thesis at the beginning of the week was that the Fed would come and go and it would be a relatively priced event In the context of investors with already long dollar positions, and noting that the dollar is already quite expensive and we’re going into year end, it seemed that now was a good time to reduce some dollar longs. But we’ve seen the opposite of that.”

Barclays expects the euro to reach parity with the dollar by the third quarter of 2017 and then to fall below $1, while JP Morgan Asset Management reckons the two currencies will become equal in the first quarter of next year.

Against the yen, the greenback surged as much as 1.5 percent to hit 118.66 yen, its strongest since February. The dollar is on track for easily its strongest quarter against the Japanese currency in over 20 years, after an almost 17 percent climb since the start of October.

Against a basket of major currencies the dollar rose 1.3 percent to a 14-year high of 103.16.

The Fed’s policy meeting was the first since the U.S. election victory of Donald Trump, who investors expect to drive up inflation and boost growth with a programme of huge fiscal expansion.

At least five of 17 Fed policymakers appeared to have boosted their interest rate outlook since September, according to the new “dot plot” of rate projections. But not all traders and analysts viewed the Fed’s statement as hawkish.

“The macroeconomic forecast is unchanged...and the dots have shifted only very slightly - the median dots went up by 25 basis points but the average only went up 6 basis points,” said UBS Wealth Management’s head of currency strategy, Thomas Flury, in Zurich.

For Reuters new Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets (Additional reporting by Abhinav Ramnarayan in London and Shinishi Saoshiro in Tokyo)

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