Asian markets slump to two-year low as dollar soars

The dollar surged to a fresh two-decade high and Asian stocks hit a two-year low on Thursday after the Federal Reserve sharply hiked US interest rates and projected raising them further and faster than investors had expected to tame inflation.

The median of Fed officials’ outlook, which has US rates at 4.4% by the end of the year and staying high in 2023, seemed to spook even hawkishly positioned rates and currency markets and quickly extinguished relief that Wednesday’s hike had not been larger.

The dollar index, a measure of the greenback against a basket of majors, extended Wednesday gains to make a new 20-year high at 111.72 during the Asia session.

The euro sank to a 20-year low of $0.9807 as Russia mobilised reservist troops for war in Ukraine. The yen briefly hit a 24-year trough when Japanese policymakers unanimously stuck with ultra-easy settings, as expected.

Gold fell 1%. Sterling, the Aussie, kiwi, loonie, Sing dollar and yuan all made milestone lows. S&P 500 futures fell 0.6% and European futures dropped 2%.

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

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

MSCI’s broadest index of Asia-Pacific shares outside Japan dropped 1.4% to its lowest level since May 2020. Japan’s Nikkei fell 0.8% and touched a two-month low.

The US yield curve deepened its inversion as investors priced out the chance of a “soft” economic landing and braced for damage to longer-run growth.

The two-year yield rose to as high as 4.1320% in Asia while the 10-year yield held at 3.5416%.

“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, the Philippines, Indonesia, Switzerland, Britain and Norway are due later in the day with hikes expected everywhere.

Japan and China are the only major global outliers, with China cutting rates to support a sputtering economy and Japan waiting for wage growth before considering an exit to an enormous bond-buying project that pins rates near zero.

The yen shot to a two-decade low at 145.50/$ in the wake of the Bank of Japan keeping policy steady, before rebounding a bit as traders are jittery about the prospect of currency intervention.

Governor Haruhiko Kuroda’s views on the yen's precipitous slide will be closely watched when he speaks at 6.30am GMT.

The Australian and New Zealand dollars were pinned at their lowest level since mid-2020, with the Aussie down 0.7% on Thursday at $0.6586 and the kiwi down 0.6% at $0.5816.

“Between the escalating geopolitical risks over Ukraine and the hawkish Fed, the US dollar is ever rampant,” said currency strategist Alvin Tan at RBC Capital Markets in Singapore.

In commodity markets, oil recouped early losses as concerns over tight supplies heading into winter eclipsed fears of a global recession, which sparked a slide in the previous session.

Brent crude futures rose 50 US cents, or 0.6%, to $90.33 a barrel by 3.19am GMT. US West Texas Intermediate (WTI) crude rose 45c to $83.39.

Wheat steadied after rising on fears of a wider and deeper war in Ukraine.

Cryptocurrencies were pinned near recent lows, with bitcoin at $18,795.

Reuters