Ankur Banerjee reports from Singapore as Asian stocks took a hit on Thursday, with the dollar holding strong at near two-year highs. This shift comes in the wake of the U.S. Federal Reserve’s indication that it will slow down the pace of rate cuts next year. Meanwhile, the yen saw a dip following the Bank of Japan’s decision to keep its rates unchanged.
The Federal Reserve’s firm stance dragged Wall Street down, setting a similar trend across Asian markets. The largest index of Asia-Pacific shares outside Japan, MSCI, witnessed a drop of 1.6%. Taiwan’s tech-centric stocks slipped by 1.2%, while Australia’s shares saw a nearly 2% decrease.
On Wednesday, the Dow Jones Industrial Average nosedived over 1,000 points, spreading a gloomy atmosphere that’s expected to reach Europe, where Eurostoxx 50 futures fell by 1.5%, German DAX futures slid 1.2%, and FTSE futures declined 1%.
In Japan, the yen hit a one-month low of 155.48 per dollar following the Bank of Japan’s decision. This year, the yen has lingered near the lower bounds of its value due to a powerful dollar and significant interest rate disparities, dropping over 8% against the dollar and heading for a fourth year of decline.
With attention now turning towards comments from the Bank of Japan’s Governor, Kazuo Ueda, investors are eager to determine the timing and magnitude of interest rate hikes next year. Traders are predicting 46 basis points of rate increases by the BOJ by the end of 2025. Ueda’s press conference, scheduled for 0630 GMT, is awaited to shed light on the bank’s decision. Despite board member Naoki Tamura’s dissenting proposal to raise rates to 0.5% due to perceived inflation risks, the majority voted against this move.
Ben Bennett, an Asia-Pacific investment strategist at Legal and General Investment Management, noted, “The hawkish Fed dot plot overnight gave the BOJ an option to increase rates, and there was one dissenting vote for a 25 bps hike. It looks like rates will be going up early in 2025.”
Both central banks’ policies highlight the challenges the global economy faces, especially as the United States prepares for President-elect Donald Trump’s leadership in the coming year. Fed Chair Jerome Powell mentioned that some officials are considering Trump’s plans, like higher tariffs and lower taxes, as influential on their policies. Last month, Ueda also pointed out Trump’s policies as a potential risk.
Rob Thompson, the macro rates strategist at RBC Capital Markets, remarked, “The risks inherent here relate to what the Trump administration might contribute in terms of inflationary pressure. It’s partly unspoken, yet significant.”
He added, “If the market decides the Fed’s finished, whether it’s driven by Trump or if inflation picks up next year, the risk remains that we might need to re-evaluate towards future hikes. Did this update give us insights? Absolutely. There’s a chance the market’s still a bit complacent around some of these risks.”
Wednesday’s anticipated Fed rate cut was accompanied by Chair Powell’s clear message about the need for caution, sparking turmoil in the markets. The U.S. central bankers projected only two quarter-percentage-point rate reductions by 2025’s end, marking a half percentage point less easing next year than previously anticipated in September.
Prashant Newnaha, Senior Asia-Pacific rates strategist at TD Securities, observed, “The Fed proved more hawkish than expected, but the change in policy guidance aligns perfectly with our forecast of a prolonged pause by the Fed at the start of 2025. The inflation projections surprised us the most, suggesting ‘higher for longer’ is back on the agenda.”
The evolving expectations of Fed rate cuts raised the dollar index, measuring it against six rivals, to heights not seen since November 2022, standing at 108.08 on Thursday. Meanwhile, the yield on U.S. 10-year notes touched a seven-month high of 4.524% on Wednesday, slightly cooling to 4.514%.
In the digital currency world, Bitcoin briefly dipped below $100,000 after Powell clarified that the U.S. central bank had no intentions of heavily investing in Bitcoin.
British sterling held its ground at $1.25835 ahead of the Bank of England’s policy announcement, where rates are expected to stay unchanged despite signs of a slowing economy. Gold climbed 0.8%, reaching $2,609 per ounce, though oil prices fell on concerns over demand.
(Reporting by Ankur Banerjee and Tom Westbrook in Singapore; Editing by Jamie Freed and Lincoln Feast.)
