Asian shares and currencies soften

Trader John Panin, right, works on the floor of the New York Stock Exchange. AP Photo/Richard Drew.

Trader John Panin, right, works on the floor of the New York Stock Exchange. AP Photo/Richard Drew.

Published Dec 15, 2016

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Sydney - Asian shares and currencies softened on Thursday

after the Federal Reserve raised rates for the first time in a year and hinted

at the risk of a faster pace of tightening than investors were positioned for.

Yields on short-term US debt surged to the highest since

2009, sending the dollar to peaks not seen in almost 14 years, which in turn

prompted China's central bank to set the yuan at its weakest level against the

greenback since 2008.

The Fed's anticipated policy path, and expectations US

President-elect Donald Trump will set growth on a higher gear, are keeping

Asian policymakers on edge as capital gets sucked out from the fragile

export-dependent regional economies toward dollar-based assets.

The Fed's rate rise of 25 basis points to 0.5-0.75

percent was well flagged but investors were spooked when the "dot

plots" of members' projections showed a median of three hikes next year,

up from two previously.

"The markets were surprised by the dot plots. Given

that the 10-year U.S. bond yield has risen above the key level of 2.5 percent,

the sell-off in bonds is likely to continue," said Hiroko Iwaki, senior

strategist at Mizuho Securities.

The change came even as the Fed's economic projections

have hardly been upgraded, suggesting the Fed could accelerate tightening even

further if policymakers see firmer evidence of higher growth or inflation.

"The US economy is already on a solid expansion but

the new administration wants to do large-scale spending. That could surely

boost inflation and US bond yields," said Norihiro Fujito, senior

investment strategist at Mitsubishi UFJ Morgan Stanley Securities.

Fed fund futures slid to imply an almost 50 percent

chance that the Fed will raise rates three times, with two hikes fully priced

in already.

The 10-year US Treasuries yields rose to 2.587 percent,

having risen more than 0.7 percentage point since Trump was elected as the next

US President.

Yields on two-year Treasury paper jumped more than 10

basis points to 1.28 percent, the biggest daily increase since early 2015 and

the highest level since August 2009. They stood at 1.267 percent in Asia.

Emerging pressure

It also took the premium that US Treasuries pay over

German two-year debt to its fattest since 2000.

The allure of higher US yields raises risks for emerging

markets in Asia and elsewhere, as funds look to take advantage of rising US

rates.

The Chinese central bank set the yuan mid-point at 6.9289

to the dollar, its weakest since June 2008, though market players noted that

the yuan has been firmer against many other currencies and rose on

trade-weighted basis.

The yuan promptly fell to its lowest levels in more than

eight years, reflecting the weakening in the daily mid-point.

Low-yielding currencies such as the Singapore dollar and

Korean won came under pressure, and analysts anticipate the low-yielders will

be on the back foot in an environment of a rising dollar, higher US yields and

a depreciating yuan.

The challenges confronting Asia's policymakers from

capital outflows was highlighted in Thursday's South Korean central bank

meeting.

Rates steady

The Bank of Korea held its key policy rate steady at a

record low of 1.25 percent and flagged growing risks for the export-reliant

economy that some analysts feel should be tempered through another rate cut.

But the BOK faces a dilemma as further easing could spark destabilising capital

flows toward higher yielding US dollar-based assets, forcing it to sit tight for

now.

The Singapore dollar fell near its January low and is on

the verge of slipping to its lowest September 2009.

Even high-yielding currencies in Asia could return some

of their recent gains if investors shy away from risk, Citi analysts said in a

note.

The US dollar was already up across the board, hitting a

near 14-year peak against a basket of currencies at 102.62.

The euro dropped to as low as $1.0468. A break below its

March 2015 low of $1.0457 could open the way for a test of $1, or parity

against the dollar, which last happened in late 2002.

The dollar rose to 117.86 yen, its highest level since

early February, though that drop in the yen cushioned Japanese stocks, lifting

Nikkei 0.1 percent.

MSCI's broadest index of Asia-Pacific shares outside

Japan dropped 1.2 percent.

European shares are expected to be open slightly weaker,

with spread-betters looking to a fall of 0.2 percent in Britain's FTSE and a

0.1 percent drop in Germany's DAX.

Wall Street suffered its biggest percentage decline since

before the November 8 US presidential election, though the loss was slight

compared with gains of the last month or so.

The Dow ended Wednesday down 0.6 percent, while the

S&P 500 lost 0.81 percent and the Nasdaq 0.5 percent.

Stocks have been on a tear in recent weeks on speculation

the incoming Trump Administration will pursue tax cuts and increase

infrastructure spending.

Oil prices stabilised as a tighter market looms in 2017

due to planned output cuts led by OPEC and Russia, after sharp declines earlier

following the Fed's action.

Brent crude futures traded at $53.89 per barrel, erasing

gains made earlier in the week that had taken it a 1 1/2-year high.

Gold dropped to its lowest in more than 10 months around

$1 135.1 an ounce and last stood at $1 141.9.

REUTERS

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