Asian markets ride high after dovish Fed rate increase

US Federal Reserve chairman Janet Yellen speaking to the media in Washington on Wednesday after the Fed raised interest rates by one quarter of a percentage point, the second hike in three months.
US Federal Reserve chairman Janet Yellen speaking to the media in Washington on Wednesday after the Fed raised interest rates by one quarter of a percentage point, the second hike in three months.PHOTO: AGENCE FRANCE-PRESSE

Less hawkish tone weighs on US dollar; some see beginning of the end of ultra-cheap credit

Markets across Asia, including Singapore, rallied yesterday as the US dollar slipped after the United States central bank raised benchmark interest rates as expected.

Some observers say the move could mark the beginning of the end of ultra-cheap credit globally.

The Fed lifted rates one quarter of a percentage point - the second hike in three months - but it was less hawkish than expected on the pace of future rate hikes.

Higher oil prices, a weaker greenback and a strong lead from Wall Street also served as tailwinds for the Straits Times Index, which rallied 0.83 per cent yesterday, and is the best-performing market in South-east Asia with a gain of 9.82 per cent so far this year.

Hong Kong jumped 2.08 per cent yesterday, Taiwan climbed 1 per cent, Malaysia gained 1.15 per cent, and Thailand was up 1.05 per cent.

"In the end, there was no reason for the market to 'beware the Ides of March' as the Fed pushed interest rates higher, but did nothing to shock," said Mr Richard Jerram, Bank of Singapore chief economist.

As expected, the Fed continued to project two more increases this year, unchanged from its projections in December, to keep a lid on inflation as it rises above the 2 per cent target level.

Markets saw this as dovish, since expectations in some quarters of as many as four rate hikes this year were quashed.

The less hawkish tone weighed on the US dollar. One US dollar could buy S$1.4036 yesterday, compared with S$1.4124 on Wednesday. Gold rallied to US$1,224.17 per ounce yesterday from US$1,201.37.

But CIMB Private Bank economist Song Seng Wun remains bullish on the greenback.

"Unless we see regional growth backed by stronger fundamentals and stronger exports, regional currencies will still be weaker relative to the US dollar," he said.

But some analysts remain cautious as they still see the possibility of a faster pace of rate hikes this year if US economic data remains robust. Fitch Ratings believes that the latest US rate hike could mark the beginning of a significant shift in the global interest rate environment, with benchmark US policy rates rising more over the long term than current market expectations.

The agency now expects a total of seven hikes over the course of this year and next year, compared with just two rate hikes in total between the end of 2008, at the height of the global financial crisis, and last year.

While the period of ultra-low borrowing costs may be coming to an end, local property stocks rallied on the dovish Fed cues yesterday, and after the Singapore Government surprised with a slight tweak to cooling measures last week.

City Developments jumped 2.6 per cent, or 27 cents, to $10.50, UOL Group rose 2.2 per cent, or 15 cents, to $6.98, and CapitaLand gained 2.2 per cent, or eight cents, to $3.73.

"Investors took a glass half-full rather than half-empty view. Although interest rates are rising, they had been close to zero and are still far from normal levels. With the Fed indicating a gradual trajectory to future hikes, and the slight relaxation of cooling measures, that won't dampen sentiment too much over the property market," Mr Song said.

He added: "In addition, the ability to stomach higher interest rates reflect a stronger US economy that is supported by spending and job creation, so export-dependent Asia should benefit from US growth."

SEE BUSINESS:

China lifts short-term rates after US Fed move

Bank of Japan keeps monetary policy steady

Fed chief reassures investors on interest rate policy

Traders cheered by Fed's dovish tone

A version of this article appeared in the print edition of The Straits Times on March 17, 2017, with the headline 'Asian markets ride high after dovish Fed rate increase'. Print Edition | Subscribe