Asian stocks drop from one-year high, dollar rises on Fed rate comments

Asian shares pulled back from a one-year high and the dollar strengthened on Wednesday, after an influential Federal Reserve official said interest rates could rise as soon as September.

European markets are poised for slight gains, with financial spreadbetter CMC Markets predicting Britain’s FTSE 100 .FTSE and France’s CAC 40 .FCHI will open up about 0.1 percent higher, and Germany’s DAX .GDAXI will start the day little changed.

MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS dipped 0.3 percent while Japan’s Nikkei .N225 closed 0.9 percent higher, paring some of Tuesday’s sharp losses, thanks to a weaker yen.

China’s CSI 300 index .CSI300 and the Shanghai Composite .SSEC both erased earlier losses to trade flat after authorities approved the launch of a long-awaited scheme to allow stock trading between Shenzhen and Hong Kong and lifted quota limits for the existing Shanghai-Hong Kong Stock Connect.

Wall Street shares retreated from record highs, with the S&P 500 .SPX losing 0.55 percent.

New York Fed President William Dudley said that as the U.S. labor market tightens and as evidence of rising wages builds, “we’re edging closer towards the point in time where it will be appropriate I think to raise interest rates further.”

Comments from Dudley, a permanent voter on policy and a close ally of Fed Chair Janet Yellen, also included an unusual warning on low bond yields and were seen as more hawkish than a cautious message last month.

Atlanta Federal Reserve Bank President Dennis Lockhart, seen as centrist, concurred saying he did not rule out a September hike – something markets have almost completely priced out.

Data released on Tuesday lent some support to their views, with U.S. industrial production and housing starts expanding in July, although consumer prices were unchanged from June, following two straight monthly increases of 0.2 percent.

Markets still only partly believe their comments, remembering that the Fed ended up keeping rates on hold in June even after Fed officials talked up the possibility of a rate hike in preceding weeks.

“Clearly the Fed seems to think the market’s pricing of a September rate hike is too low. Today’s minutes of the Fed’s July policy meeting could be more hawkish than market expectations,” said Tomoaki Shishido, fixed income strategist at Nomura Securities.

Yields on two-year notes US2YT=RR briefly touched a near three-week high of 0.758 percent, but failed to reach the July peak of 0.778 percent, and were last at 0.750 percent.

Fed funds rate futures are pricing in a 50 percent chance of a rate rise by December, a small increase from earlier this week.

The comments pulled the dollar from seven-week lows hit just after the inflation data.

The dollar’s index against a basket of six major currencies .DXY plunged as low as 94.426 on Tuesday, its lowest level since Britain voted to leave the European Union in June. It was last trading at 94.96, down 0.8 percent on the week.

The euro EUR=EBS edged back 0.1 percent to $1.12635, after touching $1.1323 on Tuesday, the highest level since the Brexit vote.

The dollar extended gains 0.7 percent to 100.97 yen JPY=EBS after falling to as low as 99.55 on Tuesday and coming within sight of its 2-1/2-year trough of 99.00 set on June 24 after the British referendum.

“As the world economy is slowing down, many countries now need a cheaper currency to support share prices. The U.S. wants a cheaper dollar and so does China, leaving the yen taking the brunt,” said Daisuke Uno, chief strategist at Sumitomo Mitsui Bank.

The British pound, which touched a five-week low against the dollar on Monday, held steady following gains of 1.3 percent on Tuesday. It also hit a three-year low of 87.245 pence per euro on Tuesday after UK inflation came in stronger than expected.

The data was the first in a run of July economic data that should show some of the initial impact of the Brexit vote on the economy.

The pound was last trading at $1.3039 GBP=D4. It was also flat against the euro at 86.405 pence EURGBP=D4.

The pound is bracing for UK unemployment data later in the day.

Oil prices slid from five-week highs on doubts that possible talks by producers to rein in a growing glut would be successful.

Brent crude futures LCOc1 dropped 0.6 percent to $48.92 a barrel, while U.S. crude CLc1 retreated 0.4 percent to $46.40.

Source: Reuters