* Fed raises rates, “dot plots” surprise on upside
* Dollar at 14-yr high on FX basket, smashes key euro levels
* Europe shares rise along with bank stocks, Wall St steady
* Oil stabilises after paring gains, gold at 10 month low
* Graphic: World FX rates in 2016 tmsnrt.rs/2egbfVh
By Marc Jones
LONDON, Dec 15 (Reuters) - The dollar charged to a 14-year high and government bond yields rose sharply on Thursday after the Federal Reserve hiked U.S. interest rates and signalled more would follow at a faster pace next year.
European shares cheered a 2.5 percent rise in bank stocks on the prospect of a boost to their profits and the Dow Jones index looked set for another run at 20,000 points. But the main action was elsewhere.
Bond markets saw yields on short-term U.S. debt surge to the highest since 2009, sending the dollar galloping past key euro levels, to a 10-month peak on the yen and prompting China to set the yuan at its weakest in eight years.
The Fed’s anticipated policy path, and expectations that Donald Trump as U.S. president will get growth motoring, are keeping emerging markets on edge as capital gets sucked from more fragile, export-dependent economies toward dollar-based assets.
The Fed’s rate rise of 25 basis points to 0.5-0.75 percent was well flagged but investors were spooked when the “dot plots” of members’ projections showed a median of three hikes next year, up from two previously.
“You had the Fed come in and be a bit more hawkish than many people, including us, were expecting,” said TD Securities head of global strategy Richard Kelly.
“It wasn’t just the move in the dots, it was the language that was used. There was an acknowledgement that if Trump gets his plans moving through Congress you could see the economy pushing higher.”
The Fed’s economic projections have hardly been upgraded, suggesting it could accelerate the monetary tightening even further if policymakers see firmer evidence of higher growth or inflation.
Fed fund futures <0#FF:> slid to imply an almost 50 percent chance that the Fed would raise rates three times, with two hikes fully priced in already.
The dollar continued to rise in European trading. It hit a 10-month high of 117.87 and then jumped through $1.0425 per euro, while the difference in yields on benchmark 10-year U.S. and German government bonds ballooned to the widest since at least 1990.
Those U.S. yields rose as far as 2.63 percent, having already risen more than 0.8 of a percentage point since Trump was elected last month. The jump in 2-year Treasury paper was the biggest daily rise since early 2015 as it topped 1.29 percent.
“One of the reasons why a bond market sell-off this time around looks more sustainable is because it can be accompanied by higher equity markets,” Peter Schaffrik, chief European macro strategist at RBC Capital Markets said.