March 27, 2017, 8:46 pm
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AS FED GOES GRADUAL: Dollar crunched, bonds boosted

SYDNEY - The dollar nursed bitter 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 U.S. 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 percent to its highest since mid-2015.

South Korea’s market climbed 1.0 percent but Japan’s Nikkei went the other way, easing 0.4 percent, as a jump in the yen pressured exporters.

The Dow had ended Wednesday with gains of 0.54 percent, while the S&P 500 added 0.84 percent and the Nasdaq 0.74 percent.

The Fed lifted its funds rate by 25 basis points to a range of 0.75 percent to 1.00 percent, 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 percent, 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 $1.0737 having climbed 1.2 percent overnight in its steepest rise since June. The dollar suffered similar losses on the yen to huddle at 113.34.

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 the dots from meeting to meeting. - Reuters
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