US dollar shines, Asia shares slip after Fed signals December rate hike

Federal Reservecchair Janet Yellen speaks during a press conference after the rate-setting meeting in Washington, DC, on September 20, 2017.
Federal Reservecchair Janet Yellen speaks during a press conference after the rate-setting meeting in Washington, DC, on September 20, 2017.PHOTO: AFP

TOKYO (REUTERS) - The US dollar shone while Asian shares slipped on Thursday (Sept 21) after the US Federal Reserve announced a plan to start shrinking its balance sheet and signalled one more rate hike later this year.

European shares are expected to benefit from a fall in the euro against the dollar with spread betters looking at a higher opening of 0.5 per cent in Germany's DAX and France's CAC.

Japan's Nikkei gained 0.2 per cent as a rise in US bond yields lifted financial shares, while the yen's fall against the dollar after the Fed's decision helped exporters.

The Bank of Japan, as widely expected, left its policy settings unchanged, with markets awaiting a news conference by its governor later in the day.

MSCI's broadest dollar-denominated index of Asia-Pacific shares outside Japan fell 0.5 per cent, with Australian shares among the hardest hit with fall of 0.8 per cent.

Major US share indexes recovered quickly from initial losses following the Fed's announcement, with the S&P 500 ending slightly higher, helped in part by gains in financials and energy shares.

"While a rate hike is negative, the fact that the Fed's confidence in the economy is strong enough to expect a rate hike can be taken as supportive of market sentiment," said Soichiro Monji, chief strategist at Daiwa SB Investments.

The Fed's view also prompted a rotation from tech shares into financial shares, which benefit from higher interest rates, he added. "In a way, what the Fed did was not much of a surprise. From now, the markets will be focusing on individual earnings rather than macro themes," said Hisashi Iwama, senior portfolio manager at Asset Management One.

As expected, the Fed said it would begin in October to trim its massive holding of U.S. Treasury bonds and mortgage-backed securities acquired in the years after the 2008 financial crisis.

The Fed signalled it still expects one more interest rate hike by the end of the year, despite a recent bout of low inflation, but ratcheted down its long-term interest rate forecasts.

Fed fund rate futures are now pricing in about a 65 per cent chance of a rate hike by December compared to around 50 percent before the latest meeting. Markets expect the Fed move to coincide with revisions of its economic projections.

The yield on two-year US Treasury notes jumped to 1.451 per cent, its highest level since November 2008 late on Wednesday. The 10-year US Treasuries yield rose to 2.278 per cent, briefly hitting a six-week high of 2.289 per cent.

"The markets reacted to the Fed quite straightforwardly, with shorter yields rising more than long-dated bond yields. The bond markets have fairly strong conviction that low inflation and low growth will persist," said Hiroko Iwaki, senior strategist at Mizuho Securities.

In the currency market, the rise in Treasury yields boosted the dollar's attractiveness.

The euro dropped to US$1.1883 from above US$1.20 just before the Fed's policy announcement.

Likewise the dollar jumped to 112.595 yen, a two-month high, from around 111.30.

Against the Singapore dollar, the greenback was up 0.63 per cent to S$1.3525 as of 2:45pm in Singapore, from it's Wednesday's close of S$1.3441.

With the dollar advancing, gold slipped to a three-week low of US$1,296 per ounce.

Oil prices flirted with multi-month highs, despite a rise in US crude inventories, after the Iraqi oil minister said Opec and its partners were considering extending or deepening output cuts, ahead of the planned meeting between OPEC and non-Opec nations on Friday.

Brent crude futures rose to a five-month high of US$56.48 a barrel on Wednesday and last stood at US$56.17, down slightly from late US levels.

US benchmark West Texas Intermediate (WTI) crude futures hit a four-month high of US$50.79 per barrel and last traded at US$50.64, down slightly from the US close on Wednesday.