The Federal Reserve raised its benchmark rate by 75 basis points on Wednesday, the third such rise in a row, and officials project rates hitting 4.4% this year – higher than markets had priced in before the meeting and 100 bps more than the Fed projected three months ago.
The dollar rose, short-dated bonds sold off and Wall Street fell overnight, with the moves extending into the Asia session.
The euro sank to a 20-year low of $0.9807 amid growing concerns about an escalation in the war in Ukraine after Russia mobilised reservists for the first time since World War II.
The dollar index, which is up 2% this week and almost 17% this year, rose 0.2% to a new 20-year high at 111.72. Gold fell 1%. S&P 500 futures eased 0.8% and European futures dropped 2%.
Sterling hit a 37-year low and the Aussie, kiwi, Canadian and Singapore dollars hit two-year lows. China’s yuan hit a two-year low and the yen hovered near a 24-year low as investors awaited a Bank of Japan meeting.
MSCI’s broadest index of Asia-Pacific shares outside Japan dropped 1.4% to its lowest since May 2020. Japan’s Nikkei fell 1% to a two-month low.
“The Fed is not going to stop any time soon and there’s going to be an extended period of restrictive monetary policy for at least the next year or so,” said Sally Auld, chief investment officer at wealth manager JB Were in Sydney.
“What else do you buy except for the U.S. dollar at the moment?” she added, citing growth clouds over Europe, Britain and China and the yen weakness as Japan holds interest rates low.
The U.S. yield curve deepened its inversion with short-end Treasuries sold and the longer end rallying as investors priced out the chance of a “soft” economic landing, and braced for damage to longer-run growth.
The two-year yield rose as high as 4.1320% in Asia while the 10-year yield held at 3.5593%.
“The chances of a soft landing are likely to diminish to the extent that policy needs to be more restrictive, or restrictive for longer,” Fed Chair Jerome Powell told reporters after the rate hike announcement.
Central bank meetings in Taiwan, Japan, the Philippines, Indonesia, Switzerland, Britain and Norway are due later in the day with hikes expected everywhere but Japan.
Japan has this week driven home its commitment to ultra-dovish monetary policy by spending more than 2 trillion yen ($13.8 billion) over the past two days to hold a 0.25% ceiling on the 10-year Japanese government bond yield.
However, even if no policy changes occur, there will be intense focus on Governor Haruhiko Kuroda’s views on the yen’s precipitous slide, as growing discomfort could hint at policy changes and dovishness could unleash further yen selling.
The yen is down about 20% on the dollar this year and at 144.46 per dollar is near a 24-year low.
“We see risk of USD/JPY heading to 147 in the coming months,” Rabobank strategist Jane Foley said in a note to clients.
The Australian and New Zealand dollars are pinned at their lowest since mid-2020, with the Aussie down 0.7% on Thursday at $0.6586 and the kiwi down 0.6% at $0.5816.
In commodity markets, oil slid on concern higher interest rates will crimp demand. U.S. crude futures were steady in early Asia trade at $83.43 a barrel. Brent futures were at $90.39.
Wheat rose overnight on fears of a wider and deeper war in Ukraine. ($1 = 144.3800 yen)