Asia Stocks Fall, Dollar Surges on Fed’s Hawkish Twist

Big 5

Asian stocks were mostly lower and the dollar surged to a three-week high versus the yen after the U.S. Federal Reserve ended its massive quantitative easing programme, as expected, but laced its economic assessment with a tinge of hawkishness.

Spreadbetters expected a more stable start for Europe, forecasting an effectively flat open for Britain’s FTSE .FTSE, Germany’s DAX .GDAXI and France’s CAC .FCHI.

MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS was down 0.6 percent.

In a statement on Wednesday after a two-day meeting, the Fed ended its quantitative easing programme of bond purchases. At its peak, the programme pumped $85 billion a month into the financial system.

The Fed did retain its basic guidance that overnight borrowing costs would remain near zero for a “considerable time”.

But it dropped the characterisation of the U.S. labour market slack as “significant” in a show of confidence in the economy’s prospects, the part markets perceived as containing a slightly hawkish turn.

“The Fed was widely expected to end quantitative easing (QE) but barely anyone anticipated such a significant upgrade to their labour market assessment,” Kathy Lien, managing director at BK Asset Management in New York, said in a note to clients.

Tokyo’s Nikkei .N225 bucked the trend in Asia and rose 0.7 percent, as investors took heart from a significantly weaker yen and outlook for exporters following the Fed’s optimism over the U.S. economy.

“The market is relieved as the rates would remain low for some time while seeing a recovery in the U.S. economy,” said Nobuhiko Kuramochi, a strategist at Mizuho Securities in Tokyo.

The dollar hovered near a three-week peak of 109.145 yen JPY= after rallying nearly 0.7 percent overnight in light of the Fed’s statements, while the euro fell to a three-week trough of $1.2605 EUR=.

The greenback benefitted as U.S. Treasury yields surged, with the benchmark 10-year Treasury note yield US10YT=RR spiking to a three-week high of 2.362 percent as market participants pulled forward expectations of when the Fed would eventually raise interest rates.

“In the near-term, rates will likely move modestly higher from here, especially in the front end of the yield curve, as we assign a higher probability to the Fed beginning to hike in mid-2015. Also, I like the U.S. dollar, as this environment of diverging central bank actions looks to be a multi-year trend,” said Erik Weisman, fixed income portfolio manager at MFS Investment Management.

With the Fed meeting out of the way the Bank of Japan’s policy decision on Friday is next in the spotlight, with focus on whether the central bank continues to show confidence in meeting its inflation target even though growth is flagging.

The strength of the U.S. currency was a blow to the New Zealand dollar NZD=D4, which tumbled on a softening stance over future interest rate increases by the Reserve Bank of New Zealand. [AUD/]

Brazil surprised late on Wednesday by hiking interest rates in a bold move that signals President Dilma Rousseff could make market-friendly policy changes after her narrow re-election victory on Sunday.

The rate hike could give the Brazilian real BRL= a further lift. It had fallen to a nine-year low against the dollar on Monday after Rousseff defeated market-friendly challenger Aecio Neves, but recovered ground as some of the pessimism faded.

Source: Reuters