Fed's change of tack stokes rally in most Asian stocks, currencies and commodities

SINGAPORE - The unexpectedly dovish monetary policy statement from Federal Reserve chair Janet Yellen, a shift apparently triggered by the US dollar's recent meteoric ascent and still-low inflation in the US, appears to have delayed the inevitable for a few months, buying businesses a little reprieve, and equities and commodities markets worldwide some cheer.

The Hang Seng Index climbed 1.3 per cent in Hong Kong, Shanghai was up 0.3 per cent, Australia jumped 1.8 per cent, while stocks from Indonesia to Taiwan and the Philippines were up fractionally. The Nikkei Stock Average however was down 0.7 per cent.

The Straits Times Index was up 14.60 points, or 0.43 per cent, at 3,376.35 at abut 1:15pm.

A number of Asian currencies surged against the US dollar. As at 1:30pm, the greenback slipped 0.8 per cent against the Singapore dollar to $1.3815. It was down 0.7 per cent against the ringgit at 3.6789, and 1.1 per cent lower against the rupiah at 13,036. The dollar also fell 0.6 per cent against the baht, and down 0.5 per cent against the Japanese yen.

The yuan, which climbed 0.5 per cent, was fuelled by the dollar's tumble overnight but also expectations that Beijing will continue to support the local currency.

Among commodities, gold rallied to US$1,168.35 an ounce, having climbed from US$1.145.00 on Wednesday. US crude was quoted at US$44.62 after gaining 3 per cent on Wednesday. Brent had settled US$2.40 higher at US$55.91 a barrel.

Wednesday's FOMC statement is a precursor to how the interest rate-setting arm of the US central bank, the Federal Open Market Committee (FOMC) sees tightening unfolding for the rest of the year. Some analysts also called it a "reality check" for market participants that have been pricing in the US dollar's strength too aggressively.

Concerns have been mounting that the rising dollar may hurt earnings of US multinational companies that dominate the S&P 500. A stronger currency makes exports of US-produced goods more expensive compared to those produced overseas and reduces the value of profits earned in other currencies.

What really stood out was the downward revision of the interest rates forecast, and US economic growth. A cautious and gradual monetary policy normalization now looks to be in the cards as the Fed appears to want to first ensure that growth, particularly in the labour market, is more stable, and for inflation to hit its target of 2 per cent.

Many brokerage houses have revised their expectations for a rate hike to start in September at the earliest, totalling between 50-75 basis points by year end. Previously, many had expected a June rate hike, and for the fed funds rate to reach 75-100 basis points by year end.

Dr Yellen had remarked that the downward revision of the Fed rate forecasts suggested that the FOMC is seeing more slack in the economy than they previously did. The conditions that are holding back the Fed's tightening include the labour force participation rate and wage growth - two key factors causing some discomfort among Fed officials.

Stagnant wages seem to evidence cyclical weakness in the US economy, while inflation targets were lowered by about half from three months ago as a strong dollar dampened imports, and slumping energy prices continue to be a drag on consumer prices.

Dr Yellen had said that a removal of the word "patient" doesn't mean an imminent rate increase will follow in June and that the timing depends on how the US economy performs.

CMC Markets analyst Nicholas Teo said the dovish Fed statement led to a "massive selldown of the US dollar and sparked the unwinding of positions that had been tied to a rate move as soon as June. This has taken the pressure off other currencies, enabling gold, euro, and most other Asian currencies to rebound."

The dollar's drop also led to a rebound in a number of commodity markets which are priced in US dollars, particularly crude oil and gasoline which have gained about 6 per cent, with US crude prices driving back toward the US$45.00 level, Mr Teo said.

gleong@sph.com.sg