Asian markets rebound, dollar falls as traders price in tightening policy

September 10, 2022
7:20 pm

AFP NewsNetwork

Asian markets rebound, dollar falls as traders price in tightening policy

Asian markets rallied on Friday after healthy performance on Wall Street, with investors largely pricing in further rate hikes aimed at curbing runaway inflation.

The more optimistic sentiment was reflected in a fall in the dollar, which has risen to a multi-decade high against its key peers in recent weeks on the back of the Federal Reserve’s dovish bias towards tighter monetary policy.

The greenback’s weakness came even after Fed Chair Jerome Powell reiterated the bank’s determination to keep raising interest rates to fight prices, even at the expense of economic growth.

His warning that “we must now act bluntly and decisively” followed comments from his deputy, Lael Brainard, who said policymakers would raise borrowing costs long enough to take inflation from 40-year highs reduce.

Still, Wall Street ended in positive territory, putting markets on course for a weekly gain and easing some pressure after sharp losses in August on worries that rising interest rates could trigger a recession.

“Markets have finally digested the fact that rates will almost certainly rise 75 basis points when the Fed next trades (September 21),” Advisors Capital Management’s JoAnne Feeney told Bloomberg TV.

“What we’re seeing, however, is some realization that maybe the sell-off we saw in the second half of August was a bit overdone,” she said.

New York’s rise trickled down to Asia, where Hong Kong was up more than 2 percent heading into a long weekend, while Tokyo, Sydney, Shanghai, Singapore, Wellington, Manila and Bangkok were all up.

OANDA’s Edward Moya said traders cheered as “Powell stuck to his hawkish script and reiterated a commitment to tightening policy until inflation is back on target.

“Wall Street expects some price relief with next week’s inflation report, but that shouldn’t affect the current pace of tightening of 75 basis points.”

Also encouraging was news that China’s inflation had eased slightly in August, giving the government more leeway to introduce further measures to support the economy, although the recovery remains subject to the strict zero-Covid strategy of state and federal government’s growth-inhibiting lockdowns falls victim to heads of government.

In FX markets, the euro stayed well above par against the dollar after the European Central Bank announced its own 75 basis point hike, as it warned inflation was “way too high” and likely “for an extended period of time” stay on target.

ECB President Christine Lagarde suggested tightening monetary policy for some time.

The yen was also slightly stronger as it risked hitting a 32-year low against the greenback, with senior Japanese officials hinting at possible measures to stem its losses should the unit fall further.

However, there is an expectation that it will post further losses as the Bank of Japan remains rigidly on ultra-loose policy despite the Fed’s increasingly hawkish moves.

Oil prices extended Thursday’s gains, although they remain pressured by ongoing worries about the impact on demand of possible recessions due to interest rate hikes and inflation.

Weakness in China’s economy and lockdowns in major cities also gave commodities traders concerns.

Reports that President Joe Biden was considering releasing more crude oil from the US strategic reserves also weighed on the market.

Washington fears prices could rise in December when European Union sanctions on Russian supplies come into effect.