Asia stocks tumble, US dollar soars as Fed steps up inflation battle

The US dollar index hit a 20-year high of 111.65 while sending the Australian, New Zealand and Canadian dollars to fresh multi-year lows. PHOTO: REUTERS

SYDNEY - The US dollar surged to a fresh two-decade high against major peers and stocks fell on Thursday after the Federal Reserve raised interest rates and forecast more hikes ahead than investors had expected.

Japan’s Nikkei fell 1.05 per cent, while South Korea’s Kospi index lost 1.49 per cent. Singapore’s Straits Times Index was down 0.24 per cent. 

The Fed hike and growing US-China tensions sent Hong Kong stocks tumbling to decade lows. The benchmark Hang Seng Index dropped as much 2.6 per cent to touch the lowest level since December 2011, before paring losses to 1.77 per cent.

The Shanghai Composite Index was down 0.17 per cent.

The United States dollar index hit a 20-year high of 111.65 and the greenback's strength sent the Australian, New Zealand and Canadian dollars down to fresh multi-year lows.

The Singapore dollar fell 0.24 per cent against the US dollar to 1.4207 as at 10.38am on Thursday.

The pound hit US$1.1233, its lowest in 37 years. South Korea's won slid past the symbolic 1,400 per dollar mark for the first time since 2009. The Thai baht, Malaysian ringgit and Swedish crown all made major new lows.

The euro sank to a 20-year low of US$0.9810 after Russia ordered the mobilisation of reserve troops in an escalation of the war in Ukraine.

The Fed raised rates sharply by 75 basis points on Wednesday - the third such rise in a row. This takes the central bank's benchmark overnight rate target range to 3 per cent to 3.25 per cent.

Projections showed officials think that rates are going higher and growth is going lower, and the median forecast is for the funds rate to hit 4.4 per cent this year - higher than markets had priced and 100 basis points more than the Fed projected three months ago.

"The Fed is not going to stop any time soon and there is going to be an extended period of restrictive monetary policy for at least the next year or so," said chief investment officer Sally Auld at wealth manager JBWere in Sydney.

"What else do you buy except for the US dollar at the moment?" she added, with growth clouds over Europe, Britain and China and the yen tanking as Japan holds interest rates low.

The US yield curve deepened its inversion in a volatile session overnight, as short-end Treasuries sold and the longer end rallied, with investors pricing out the chance of a soft economic landing and bracing for damage to longer-run growth.

The two-year yield rose as high as 4.1230 per cent and was last at 4.0848 per cent, while the 10-year yield fell six basis points to 3.5120 per cent.

"The chances of a soft landing are likely to diminish to the extent that policy needs to be more restrictive, or restrictive for longer," Fed chair Jerome Powell told reporters after the rate hike announcement.

Hikes ahead

Central bank meetings in Taiwan, Japan, the Philippines, Indonesia, Britain and Norway are due later in the day, with hikes expected everywhere but Japan.

Japan has this week driven home its commitment to ultra-dovish policy by spending more than 2 trillion yen (S$19.6 billion) in the past two days to hold a 0.25 per cent ceiling on the 10-year Japanese government bond yield.

However, even if no policy changes occur, there will be intense focus on Bank of Japan governor Haruhiko Kuroda's views on the yen's precipitous slide, as growing discomfort could hint at policy changes and dovishness could unleash further yen selling.

The yen is down about 20 per cent on the dollar this year and, at 144.29 per dollar, is near a 24-year low.

There is a risk of the dollar-yen "heading to 147 in the coming months", Rabobank strategist Jane Foley said in a note to clients.

The Australian and New Zealand dollars are pinned at their lowest since mid-2020, with the Aussie down 0.3 per cent on Thursday to US$0.6611 and the kiwi down 0.4 per cent to US$0.5831.

China's renminbi is on the weaker side of 7 yuan per dollar. The US dollar index hit a 20-year peak of 111.63 in the wake of the Fed hike.

In commodity markets, oil slid on concern higher interest rates will crimp demand. US crude futures were steady in early Asia trade at US$82.81 a barrel. Brent futures were at US$89.83. REUTERS

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