The dollar extended losses against the yen as well as the pound and euro after the Federal Reserve acknowledged progress in the fight against inflation – Copyright AFP/File STR
Most Asian markets rose Thursday and the dollar weakened further on hopes the Federal Reserve’s campaign of interest rate hikes could be close to an end after it acknowledged progress in its long-running battle against inflation.
Tech firms led a surge in the Nasdaq and S&P 500 on Wall Street after the central bank unveiled its forecast quarter-point increase in borrowing costs but also noted progress in bringing prices under control.
And while chair Jerome Powell warned officials would need “substantially more evidence” to be confident that inflation is on a sustained downward path, analysts said he appeared unmoved by market expectations for a lower “terminal rate”.
The decision to lift rates by the smallest amount in almost a year came after a series of data points suggested the world’s top economy was slowing down, with inflation at its lowest since October 2021.
The broadly dovish turn from the Fed provided an extra fillip to investors, who had grown concerned that January’s rally may have been overdone and that the rate hikes would continue for well into the year.
“The message from chair Powell and the Fed committee members was to be ‘mission not-accomplished’, that the disinflation process had only just begun and there is more to be done to get inflation back to the 2% target with on-going rates hikes,” said Kerry Craig at JP Morgan Asset Management.
“However, what was delivered was a more dovish message that didn’t really push back on the market expectation that the Fed won’t reach a policy rate over five percent.”
He added that Powell “seems to be less concerned about short-term moves in financial conditions and more so with the 450 basis points in policy tightening in the last 12 months and the lagged impact it would have on the economy”.
“Even as Chair Powell reiterated the Fed’s commitment to getting inflation back to the mandated percent target, it also referenced the ongoing or expected disinflation in the economy just as much.”
– Dollar weakens –
The news pushed all three main indexes on Wall Street higher, with the Nasdaq up two percent — tech firms prefer a low interest rate environment.
In early Asian trade, Hong Kong, Tokyo, Shanghai, Sydney, Seoul, Wellington, Taipei and Jakarta all rose.
And the dollar extended Wednesday’s losses after sinking against the yen, pound and euro in reaction to the softer tone from the Fed.
Forex traders will now turn their attention to policy decisions by the Bank of England and European Central Bank later in the day. They come after figures Wednesday showed eurozone inflation slowed much more than expected in December thanks to a drop in energy prices.
However, Thornburg Investment Management’s Ali Hassan warned the battle against inflation had not yet been won.
“An easing in financial conditions (that is, lower market interest rates, tighter spreads, higher equity prices) is counterproductive to controlling inflation,” he said in a note.
“The Fed will likely have to start more hawkish talk in order to walk back Powell’s comments on financial easing.”
Oil prices rose in Asian trade, helped by the weaker dollar, easing concerns about the economic outlook in light of the Fed remarks and hopes for China’s recovery.
The gains helped both main contracts bounce back after tumbling around three percent Wednesday on the back of data showing a pick-up in US stockpiles that dampened demand optimism.
– Key figures around 0230 GMT –
Tokyo – Nikkei 225: UP 0.2 percent at 27,391.85 (break)
Hong Kong – Hang Seng Index: UP 0.6 percent at 22,204.52
Shanghai – Composite: UP 0.1 percent at 3,288.64
Dollar/yen: DOWN at 128.53 yen from 128.90 yen on Wednesday
Euro/dollar: UP at $1.1017 from $1.0995
Pound/dollar: UP at $1.2384 from $1.2378
Euro/pound: UP at 88.98 pence from 88.76 pence
West Texas Intermediate: UP 0.8 percent at $77.01 per barrel
Brent North Sea crude: UP 0.7 percent at $83.41 per barrel
New York – Dow: UP less than 0.1 percent at 34,092.96 (close)
London – FTSE 100: DOWN 0.1 percent at 7,761.11 (close)