Dollar crunched by cautious Fed, bonds cheer

SYDNEY: The dollar nursed sharp losses in Asia on Thursday while sovereign bonds savoured their biggest rally in nine months after the Federal Reserve hiked interest rates, as expected, but signalled no pick-up in the pace of tightening.
The euro got an added bonus when early returns showed the anti-EU party of Geert Wilders won fewer seats than expected in Dutch elections, soothing fears that public opinion was swinging inexorably toward a break-up of the union.
The sigh of relief was heard across Asia as investors had feared faster US hikes and more political upheaval in Europe could spook funds out of emerging markets.
“The Fed makes the world safe for risk until June,” said CitiFX strategist Steven Englander.”Buy emerging market FX, equities, commodities.”
Somebody seemed to be listening as gold, copper and oil all rallied as the dollar dropped.
MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.9 per cent to its highest since mid-2015.
South Korea’s market climbed 0.6 per cent, but Japan’s Nikkei dipped 0.1 per cent as a jump in the yen pressured exporters.
Shanghai stocks added 0.6 per cent with investors seemingly untroubled as China’s central bank raised short-term rates for the third time in as many months.
The Dow had ended on Wednesday with gains of 0.54 per cent, while the S&P 500 added 0.84 per cent and the Nasdaq 0.74 per cent.
The Fed lifted its funds rate by 25 basis points, as expected, to a range of 0.75 per cent to 1.00 per cent, but said further increases would only be “gradual.”
Crucially, officials stuck to their outlook for two more hikes this year and three more in 2018, when many had expected an accelerated spate of moves.
Rather, the Fed said its inflation target was “symmetric,” indicating that after a decade of below-target inflation it could tolerate a quicker pace of price rises.
That was painful news for bond bears who had built up huge short positions in Treasuries in anticipation of a hawkish Fed.
Yields on two-year notes were down at 1.30 per cent, having fallen 8 basis points overnight in the biggest daily rally since June last year.
They had been at their highest since June 2009.
The drop pulled the rug out from the dollar, which sank to a three-week low of 100.510 against a basket of currencies.
The euro was taking in the view at $1.0727, having climbed 1.2 per cent overnight in its steepest rise since June.
The dollar suffered similar losses on the yen to huddle at 113.38.
Richard Franulovich, a forex analyst at Westpac, noted history showed a strong positive correlation between the dollar and yields one week after a Fed meeting and the direction and magnitude of the change in policymakers’ projected rate increases — termed dots — from meeting to meeting.
“The absence of any overt hawkish guidance from the Fed and their dots should leave the dollar trading on the back foot over the next month,” he said.
The yen and the Swiss franc tended to move the most in the first week, he added, but the impact tended to be longer lasting on the Australian and Canadian dollars.
The Aussie currency did indeed rise a rousing 2 per cent in the wake of the Fed, but took a slight knock on Thursday when local data showed the country’s jobless rate hit a 13-month peak in February.
A protracted bout of weakness for the US dollar would be seen as positive for commodities priced in the currency.
Spot gold was up at $1,224.61 an ounce, after enjoying its biggest daily jump since September.— Reuters