Bonds stung, dollar cheered by sudden hawkish turn at Fed

SYDNEY: Asian equities touched a three-week low on Thursday after the US Federal Reserve stunned investors by signalling it might raise interest rates at a much faster pace than assumed, sending bond yields and the dollar sharply higher.

The dollar hung on to most of what was the strongest one-day rise in 15 months after the Fed meeting, while benchmark 10-year US Treasury yields lifted by the most since early March.

The fallout in equities has been softer, with modest losses on Wall Street and MSCI's broadest index of Asia-Pacific shares outside Japan falling to its lowest since late May, sitting 0.5% lower by mid afternoon.

Japan's Nikkei fell 1%. S&P 500 futures edged 0.4% lower and EuroSTOXX 50 futures fell 0.4%. FTSE futures were also off 0.4%.

"The new Fed 'dot plot' indicating that the median FOMC member now forecasts two Fed rate hikes in 2023, versus none in the March iteration, represented the hawkish surprise out of the June Fed meeting," said Ray Attrill, head of FX strategy at NAB.

The Fed forecasts, or dot plots, showed 13 of the 18 person policy board saw rates rising in 2023 versus only six previously, while seven tipped a first move in 2022.

While the plots are not commitments and have a poor track record of predicting rates, the sudden shift was still a shock.

The Fed rubbed salt into the wound by signalling it would now be considering whether to taper its asset purchases meeting by meeting and downgraded the risk from the pandemic given progress in vaccination.

Analysts at JPMorgan noted Chair Jerome Powell was not as aggressive in his media conference.

"It appears that faster progress toward reopening and higher inflation surprises revealed some hawks on the FOMC, but we suspect that leadership is predominantly anchored at zero or one hike in 2023," they said in a note.

"We continue to look for lift-off in 2023, with tapering starting early next year."

Markets moved quickly to price in the risk of earlier action and Fed fund futures shifted to imply a first hike by the end of 2022. Yields on 10-year bonds shot up almost nine basis points to 1.57%.

The dollar also smashed up out of recent tight ranges, rising 0.9% on Wednesday against a basket of currencies to 91.387 for its biggest gain since March last year.

It hung on to that against most majors in Asia, although its failure to go further had some analysts predicting its bounce could be temporary.

"I find it hard to believe that this dollar strength can hold off all the way through late August and September said Kay Van Petersen, global macro strategist at Saxo Capital Markets in Singapore, as investors find opportunities elsewhere.

The euro crept back above $1.20 late in the Asia session and the dollar kept just shy of its 2021 against the yen, last buying 110.65 yen.

The kiwi clawed back about half of its overnight losses after first-quarter growth figures blew past forecasts, while the Aussie and emerging market currencies stabilised.

Ahead for currency markets is an interest rate decision from Turkey's central bank due at 1100 GMT, which has the lira on edge.

Elsewhere the rise in bond yields and the dollar were a double blow for non-yielding gold which was down at $1,815 an ounce after sliding 2.5% overnight.

Oil prices were insulated by the prospect of stronger world demand and still tight supply, with Brent reaching its highest since April 2019 before running into profit taking and headwinds from the sharply higher dollar.

Brent was last off 0.3% at $74.15 a barrel, while US crude lost 0.2% as well to trade at $71.98.