Asian shares fall after Fed rate hike, tracking Wall St lead

GBPUSDJune14

GBPUSDJune14

The Hang Seng in Hong Kong dropped 0.9 percent to 25,643.15. The market had priced in a 97% likelihood of a US Federal Reserve rate hike so it is no surprise that the decision has not boosted the dollar.

The Federal Reserve raised interest rates on Wednesday for the second time in three months, forecasting one more hike this year. In reaction to the hike, the 10-year yield hit a low of 2.103 percent, its lowest level since November 10, 2016. Shares of Toshiba are lower by more than 1 percent. The euro dropped to $1.1160 from $1.1217.

In commodities, oil prices fell more than 1 percent, on the backfoot again on worries about USA oversupply.

Investors fully expect a rate rise largely because Fed officials have told them to, so attention will rather be on the outlook for policy and particularly when the central bank might begin to wind down its massive portfolio of USA debt.

The U.S. central bank's rate-setting committee said the economy had continued to strengthen, job gains remained solid and indicated it viewed a recent softness in inflation as largely transitory.

The latest move by the Fed shows that the central bank continues to believe that the USA economy is strengthening.

Against its Japanese counterpart, the dollar shrugged off earlier losses and was flat at 109.54 yen, above Wednesday's eight-week low of 108.81 yen. Fed policymakers now expect the rate to be at 4.3 percent by the end of the year, down from a March forecast of 4.5 percent.

"Investors believe that it is going to take the Fed some time to confirm that inflation is strong enough to raise rates again, and in the meantime, the Fed is going to start reducing its balance sheet at a gradual pace", said Kumiko Ishikawa, FX market analyst at Sony Financial Holdings in Tokyo.

The relatively firm Federal Reserve statement from Wednesday and an unexpected 5-3 Bank of England vote to hold interest rates at 0.25% had some impact in shifting expectations surrounding global central bank policies with a slightly more hawkish slant than had been priced in.

The dollar index was little changed on Thursday after sliding to as low as 96.323 on Wednesday, having shed almost 6 percent on the year, before bouncing back a tad on the Fed's policy tightening. Spot gold fell 0.5 percent to $1,254.05 an ounce. Brent crude oil was down 45 cents a barrel at $48.27 while US crude was 50 cents lower at $45.96. Long-dated Treasury yields though tumbled to their lowest since early November, thanks to the weak inflation and other economic data.

Inflation tends to erode bonds' value over time, with a signal of easing inflation sparking some buying in government paper, driving yields down.

"I still expect this to be the last hike for 2017, given emerging headwinds for the USA economy, in particular for consumption, as well as the worryingly weak inflation and wage growth paths", she said.

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