Asian stocks rally, US dollar falls after Fed stands pat and slows pace of future hikes

 The Federal Reserve Building in Washington.
The Federal Reserve Building in Washington. PHOTO: REUTERS

WELLINGTON/SYDNEY (BLOOMBERG) - Asian stocks rallied on Thursday (Sept 22), South Korea's won strengthened and regional bonds rose after the Federal Reserve damped the outlook for US interest-rate increases.

MSCI's broadest index of Asia-Pacific shares outside Japan advanced 0.9 per cent in its sixth straight session of gains, just 1.1 per cent off its one-year high touched earlier this month. Australian shares rose 0.9 per cent, while South Korea's Kospi advanced 1 per cent.

Markets in Japan are closed for a holiday.

A divided US central bank left the key rate unchanged on Wednesday to await more evidence of progress toward its goals, with officials still projecting a rate hike by year-end. The Fed sees two increases next year, down from three projected in June. The decision came on the same day that the Bank of Japan maintained its record stimulus, while shifting its focus away from a rigid target for the supply of money.

Traders have been losing faith in the Fed's ability to diverge from the looser policy stance of central banks in Europe and Japan amid evidence of inconsistent strength in the world's largest economy.

Futures on the S&P 500 Index declined 0.1 per cent after the underlying gauge climbed 1.1 per cent on Wednesday after the Fed announcement.

Bloomberg's US dollar gauge, which tracks the greenback against 10 major peers, slipped 0.2 per cent, after sliding 0.7 per cent in the last session. The won jumped 1.7 per cent and the yen rose as much as 0.2 per cent to 100.12 per dollar, after strengthening 1.4 per cent on Wednesday.

The Fed's so-called "dot plot," used to signal its outlook for the path of interest rates, showed that officials expected one quarter-point rate increase this year. Three policy makers projected that keeping rates unchanged this year would be most appropriate. Futures prices indicate the chance of a rate hike by December climbed to 61 per cent, from 52 per cent a week earlier.

"Even if they do raise rates in December, the trajectory of hikes is starting to come down, and that's giving stocks a bit more of a bid," said Bill Schultz, who oversees US$1.2 billion as chief investment officer of McQueen, Ball & Associates Inc, referring to the Fed.

The Fed's statement came after the BOJ altered policy on Wednesday, giving it scope to keep easing to revive Japan's economy and inflation, while limiting the negative impact on bank earnings. Japan's central bank said it would adjust the volume of its asset purchases as necessary in the short term, while keeping it at about 80 trillion yen (S$1.07 billion) annually over the long term. It left the rate on some bank reserves unchanged at minus 0.1 per cent.