Sydney - Asian shares and currencies softened on Thursday
after the Federal Reserve raised rates for the first time in a year and hinted
at the risk of a faster pace of tightening than investors were positioned for.
Yields on short-term US debt surged to the highest since
2009, sending the dollar to peaks not seen in almost 14 years, which in turn
prompted China's central bank to set the yuan at its weakest level against the
greenback since 2008.
The Fed's anticipated policy path, and expectations US
President-elect Donald Trump will set growth on a higher gear, are keeping
Asian policymakers on edge as capital gets sucked out from the fragile
export-dependent regional 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.
"The markets were surprised by the dot plots. Given
that the 10-year U.S. bond yield has risen above the key level of 2.5 percent,
the sell-off in bonds is likely to continue," said Hiroko Iwaki, senior
strategist at Mizuho Securities.
The change came even as the Fed's economic projections
have hardly been upgraded, suggesting the Fed could accelerate tightening even
further if policymakers see firmer evidence of higher growth or inflation.
"The US economy is already on a solid expansion but
the new administration wants to do large-scale spending. That could surely
boost inflation and US bond yields," said Norihiro Fujito, senior
investment strategist at Mitsubishi UFJ Morgan Stanley Securities.
Fed fund futures slid to imply an almost 50 percent
chance that the Fed will raise rates three times, with two hikes fully priced
in already.
The 10-year US Treasuries yields rose to 2.587 percent,
having risen more than 0.7 percentage point since Trump was elected as the next
US President.
Yields on two-year Treasury paper jumped more than 10
basis points to 1.28 percent, the biggest daily increase since early 2015 and
the highest level since August 2009. They stood at 1.267 percent in Asia.
Emerging pressure
It also took the premium that US Treasuries pay over
German two-year debt to its fattest since 2000.
The allure of higher US yields raises risks for emerging
markets in Asia and elsewhere, as funds look to take advantage of rising US
rates.
The Chinese central bank set the yuan mid-point at 6.9289
to the dollar, its weakest since June 2008, though market players noted that
the yuan has been firmer against many other currencies and rose on
trade-weighted basis.
The yuan promptly fell to its lowest levels in more than
eight years, reflecting the weakening in the daily mid-point.
Low-yielding currencies such as the Singapore dollar and
Korean won came under pressure, and analysts anticipate the low-yielders will
be on the back foot in an environment of a rising dollar, higher US yields and
a depreciating yuan.
The challenges confronting Asia's policymakers from
capital outflows was highlighted in Thursday's South Korean central bank
meeting.
Rates steady
The Bank of Korea held its key policy rate steady at a
record low of 1.25 percent and flagged growing risks for the export-reliant
economy that some analysts feel should be tempered through another rate cut.
But the BOK faces a dilemma as further easing could spark destabilising capital
flows toward higher yielding US dollar-based assets, forcing it to sit tight for
now.
The Singapore dollar fell near its January low and is on
the verge of slipping to its lowest September 2009.
Even high-yielding currencies in Asia could return some
of their recent gains if investors shy away from risk, Citi analysts said in a
note.
The US dollar was already up across the board, hitting a
near 14-year peak against a basket of currencies at 102.62.
The euro dropped to as low as $1.0468. A break below its
March 2015 low of $1.0457 could open the way for a test of $1, or parity
against the dollar, which last happened in late 2002.
The dollar rose to 117.86 yen, its highest level since
early February, though that drop in the yen cushioned Japanese stocks, lifting
Nikkei 0.1 percent.
MSCI's broadest index of Asia-Pacific shares outside
Japan dropped 1.2 percent.
European shares are expected to be open slightly weaker,
with spread-betters looking to a fall of 0.2 percent in Britain's FTSE and a
0.1 percent drop in Germany's DAX.
Wall Street suffered its biggest percentage decline since
before the November 8 US presidential election, though the loss was slight
compared with gains of the last month or so.
The Dow ended Wednesday down 0.6 percent, while the
S&P 500 lost 0.81 percent and the Nasdaq 0.5 percent.
Stocks have been on a tear in recent weeks on speculation
the incoming Trump Administration will pursue tax cuts and increase
infrastructure spending.
Oil prices stabilised as a tighter market looms in 2017
due to planned output cuts led by OPEC and Russia, after sharp declines earlier
following the Fed's action.
Brent crude futures traded at $53.89 per barrel, erasing
gains made earlier in the week that had taken it a 1 1/2-year high.
Gold dropped to its lowest in more than 10 months around
$1 135.1 an ounce and last stood at $1 141.9.