US dollar firm, Asian shares retreat as Fed hike looms

SYDNEY (REUTERS) - The US dollar held broad gains on Friday (March 3) as the risk of an imminent US interest rate hike slugged sovereign bonds and commodities, even managing to sour Wall Street's party as the reality of rising borrowing costs began to sink in.

Asian stock markets were mostly lower, with MSCI's broadest index of Asia-Pacific shares outside Japan off 0.9 per cent in the biggest daily drop so far this year.

Australia fell 0.8 per cent and Shanghai 0.5 per cent. Japan's Nikkei eased just 0.1 per cent as a weaker yen helped limit the losses.

A chorus line of Fed officials singing of the need for higher rates has seen the implied probability of a move this month shoot to 74 per cent, from just 30 per cent at the start of the week.

Fed chair Janet Yellen and vice chair Stanley Fischer are both due to speak later on Friday and are expected to stick to the same tune.

"The US dollar has been snapped up across the board as a March Fed hike is heavily priced in," said Sean Callow, a senior currency strategist at Westpac. "All it took was about a hundred comments from Fed officials, but markets have finally decided that "fairly soon" means less than two weeks and that perhaps 3 hikes this year means 3 hikes this year."

That was enough to make even Wall Street pause, and the Dow fell 0.53 per cent, while the S&P 500 lost 0.59 per cent and the Nasdaq 0.73 per cent.

Caterpillar was among the biggest casualties, shedding 4.2 per cent on news that federal law enforcement officials searched its Illinois facilities.

The prospect of a Fed hike on March 15 saw yields on two-year Treasury notes shatter their recent range to reach ground last trod in mid-2009.

With the European Central Bank still acting to suppress short-term euro rates, the spread between US and German two-year yields yawned out to 214 basis points, the widest since early 2000 and up from a low of 183 in January.

That shoved the euro down to US$1.0510 and set up a test of major support at the February low of US$1.0492. The dollar likewise held at 114.28 yen and eyed the recent peak of 114.95. Against a basket of currencies, the dollar eased a fraction to 102.070 after touching its highest since Jan. 11.

That strength was not good news for commodities priced in dollars with everything from gold to copper taking a hit.

Gold was down at US$1,231.82 an ounce, after suffering its biggest one-day decline since December on Thursday.

Oil prices took an extra blow after Russian crude production remained unchanged in February, showing weak compliance with a global deal to curb supply to tighten the oversupplied market.

Early Friday, US crude was up 15 cents at US$52.76, having shed more than 2 per cent on Thursday, while Brent edged up 14 cents to US$55.21 per barrel.