Asia shares hit 2007 highs, US dollar sinks on Fed inflation tweak

People walk past an electronic board showing Japan's Nikkei average outside a brokerage in Tokyo.
People walk past an electronic board showing Japan's Nikkei average outside a brokerage in Tokyo. PHOTO: REUTERS

SYDNEY (REUTERS) - Stocks, bonds and commodities were all on a roll in Asia on Thursday (July 27), as bulls scented a softening in the Federal Reserve's confidence on inflation that promised to keep US interest rates low for longer than some had expected.

MSCI's broadest index of Asia-Pacific shares outside Japan climbed 0.9 per cent to heights not seen since December 2007. It has gained over 5 per cent so far this month.

South Korea and Japan's Nikkei both added 0.2 per cent, while Australia put on 0.3 per cent. Stocks in the Philippines were at a one-year peak and Hong Kong's Hang Seng index added 0.3 per cent to push above 27,000.

Singapore's Straits Times Index was 0.4 per cent higher at 3,348.75.

But worries about tighter regulations nudged China's blue-chip CSI300 index down 0.7 per cent, though data showed a pick up in profit growth for industrial firms.

The latest rush for risk came after the Fed left US rates unmoved as expected on Thursday, and tweaked its wording on inflation.

The market seized on the fact that the central bank noted that both overall and core inflation had declined, and it removed the qualifier "recently," perhaps suggesting concerns the slowdown might not be temporary.

The Fed also said it expected to start winding down its massive holdings of bonds "relatively soon," cementing expectations of a September start.

While that would be an effective tightening in financial conditions it might also lessen the need for actual hikes in rates, which matter more for currency valuations.

"The dollar's biggest problem is it can't expect help from the Fed for a long time," said Alan Ruskin, global head of forex at Deutsche. "In the short-term we are still in a risk-favourable loop, whereby subdued goods and services inflation supports a well behaved bond market and asset inflation. It's just another day in paradise."

A Reuters poll showed most primary dealers, the banks authorized to trade directly with the Fed, still see the Fed's next rate rise in December. But Fed funds rate futures are pricing in less than 50 per cent chance of a hike by then, compared to more than 50 per cent before the Fed's meeting.

Yields on US 10-year benchmark US Treasuries fell 5 basis points and were last at 2.278 per cent. The dollar followed, falling to a 13-month trough against a basket of currencies of 93.322.

The euro, which had been bumping up against a 23-month top for most of the week, finally broke through to reach US$1.1750, its highest since January, 2015.

The next major chart target was the 200-week average at US$1.1807 - a measure the euro has not traded above since August 2014.

The dollar was fast approaching the 200-week barrier on its Canadian counterpart, and had breached that technically important level on the Australian dollar.

The dollar even fell back against the yen to 110.875, though the damage was somewhat limited by expectations the Bank of Japan would keep its super-easy policies in place longer than most other global central banks.

The prospect of US policy staying stimulative saw Wall Street's fear gauge touch a record low as stocks notched record closing highs. The Dow ended Wednesday up 0.45 per cent, while the S&P 500 added 0.03 per cent and the Nasdaq 0.16 per cent.

The declining US dollar boosted commodities priced in the currency. Spot gold hit a six-week high and was last trading at US$1,263.80, while copper reached territory not trod since May 2015.

Oil prices neared eight-week highs as a surprisingly sharp drop in US inventories encouraged speculation a global crude glut would recede.

A bout of profit-taking in Asia on Thursday saw Brent crude futures ease 6 cents to US$50.91 a barrel, while US crude dipped 7 cents to US$48.68.