The dollar hit a two-decade high as Asian currencies – and stocks – fell on Thursday after investors were thrown off balance by the Federal Reserve’s hawkish outlook on US interest rates.
Bearish bets on most Asian currencies hit record highs, driven by a dollar and mounting pressure on the Chinese yuan, which fell to a low in more than 27 months.
Short positions on the yuanSouth Korean Won, Singapore dollar and the Taiwanese dollar all hit their highest levels on record, according to a biweekly poll of 11 people surveyed ahead of the conclusion of the Fed’s two-day policy meeting on Wednesday.
The Fed raised interest rates by 75 basis points for the third consecutive time and forecast a rate hike faster and at a higher level than investors had expected, sending the dollar to a new high against a basket of currencies.
The rate outlook is helping to push the dollar higher as US yields look attractive and investors believe other economies look too fragile to sustain rates as high as those envisaged in the US.
Intervention in yen
Japan and China are the outliers and their currencies are slipping particularly hard – the yen falling to the weaker side of 145 to the dollar in early trading on Thursday as the Bank of Japan stuck to its ultra-fast monetary policy. soft.
Later, the yen soared after officials intervened in the foreign exchange market for the first time since 1998 to support minted currency.
The dollar fell more than 1% to 142.3 yen, having earlier traded more than 1% higher against the Japanese currency. It was last down 0.42% at 143.4.
Yields in the Japanese government bond market also fell as speculators closed some bets on impending policy changes.
Yuan faces biggest loss since 1994
Meanwhile, the PBoC has been setting firmer-than-expected daily yuan midpoints since late August to contain the currency’s weakness.
It also lowered the amount that foreign financial institutions must hold as reserves, and warned the market of strong one-sided bets against the yuan.
But the currency still looks poised for its biggest annual loss since 1994, when China unified official and market exchange rates.
The onshore yuan ended the domestic session at 7.0810 per dollar, its weakest close since June 18, 2020.
The Thai baht, Malaysian ringgit and won recently fell to multi-year lows, while the Philippine peso fell to a record low on Thursday.
The euro fell to its lowest level in 20 years during the session in Asia, the yen at a 24-year low and the pound sterling at its lowest level since 1985. Russia’s decision to mobilize reservists for the war in Ukraine added to the gloomy mood.
Contrary to the regional trend, short positions in the Indian rupee fell to a six-week low, supported by foreign flows into local debt and equity markets.
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Asian stocks down
Asian stocks, as measured by MSCI’s broadest index of Asian stocks outside Japan, fell 1.4% to their lowest level in two years. The Japanese Nikkei was down 0.5%, but found some support after the Bank of Japan maintained its accommodative policy.
Pan-European futures were last down 1.9% and FTSE futures were down 0.9%. S&P 500 futures fell 0.5%.
“I think the stock markets were still hoping the Fed would show some sign of stopping rate hikes at some point, but there was no sign of that,” Nomura strategist Naka Matsuzawa said in Tokyo. .
In the rates market, short-term yields remain on the rise and the benchmark fed funds peak is a moving target.
The median of Fed officials’ own outlook calls for U.S. rates at 4.4% by the end of the year — 100 basis points higher than their June projection — and even higher, at 4.6% , by the end of 2023.
Futures rushed to catch up. The yield on two-year Treasury bills hit a 15-year high of 4.1320% on Thursday. Ten-year yields are below that level, at 3.5477%, as traders factor in the damage the upsides have done to long-term growth.
“No one knows if this process will lead to a recession, or if so, how deep that recession would be,” Fed Chairman Jerome Powell told reporters after the rate hike was announced. .
“The chances of a soft landing are likely to diminish to the extent that the policy has to be more restrictive, or restrictive for longer.”
More rate hikes
More rate hikes were expected on Thursday – in Indonesia, the Philippines, Britain, Switzerland and Norway – and four of them took place during the Asian trading day.
Bank Indonesia raised interest rates by 50 basis points to 4.25% – more than expected – as it sought to to master inflation after the government increased subsidized fuel price earlier this month, while supporting the rupee.
The central bank of the Philippines, Bangko Sentral Ng Philippinesalso raised its policy rate by 50 basis points.
The Swiss National Bank raised its key interest rate to 0.5% from the minus 0.25% level it set in June – only the second increase in 15 years.
Norway’s central bank also raised its benchmark interest rate by 50 basis points – to 2.25%, as most economists had expected, although it said future hikes would be “more progressives”, which weakened the currency of the krone.
Norway Bank said it would likely rise again in November, but its rate path forecast suggested a smaller rise, economists said.
The central bank’s monetary policy committee raised the overnight deposit rate from 1.75% to 2.25%, after signaling in August that a rise in September was likely, but did not say by how much.
And traders see an 80% chance of a 75 basis point hike from the Bank of England.
But those moves aren’t exactly life-saving for national currencies, as the Swedish krona is at an all-time high despite the country’s biggest rate hike in a generation this week.
The rising dollar sent emerging market currencies tumbling and penalized cryptocurrencies and commodities. Spot gold was down 0.7% on Thursday and near a two-year low at $1,661 an ounce. Bitcoin was just below $19,000.
Brent crude stabilized at $90.33 a barrel after slipping on demand concerns.
The pound hit a 37-year low at $1.1221. The euro fell to $0.9810.
The Australian and New Zealand dollars were pinned near their lowest since mid-2020, with the Aussie down 0.5% on Thursday to $0.6602 and the Kiwi down 0.4% to 0 .5832$.
“The Fed isn’t going to stop anytime soon,” said Sally Auld, chief investment officer at wealth manager JB Were in Sydney. “What else are you buying besides the US dollar right now?”
- Reuters with additional editing by Jim Pollard
NOTE: This report was updated on September 22, 2022 with more details such as rate hikes by other central banks and Japan’s intervention in the foreign exchange market.