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Asia update: Stocks, dollar climb as Fed lifts off

Thursday, December 17, 2015 - 10:41
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Asian shares retreated in choppy trade on Tuesday, led by Chinese stocks, whose early rebound fizzled out as investors remained unconvinced by Beijing's moves to restore market confidence following a disastrous start to the new year.

[SYDNEY] Asian stock markets jumped on Thursday as investors chose to take an historic hike in US interest rates as a mark of confidence in the world's largest economy, lifting the dollar and piling on the pain for oil prices.

China also allowed its currency slip for a 10th straight session to hit its lowest since June 2011. The steady decline in turn puts pressure on other Asian currencies to depreciate to stay competitive.

The Federal Reserve's 25-basis-point increase was almost a decade in the making and easily one of the most telegraphed in history. So there was some relief that, after months of waiting and several false starts, the move was finally done and dusted. "The Fed will be absolutely delighted with the lack of volatility across all asset classes," said Alan Ruskin, global head of forex at Deutsche. "Nothing here to change a view that we can have a moderate'risk-positive rallyette', even if the probability of a March hike is significantly higher than priced." Japan's Nikkei added 2.4 per cent, on top of Tuesday's 2.6 per cent advance. Australian stocks climbed 1.7 per cent, while Shanghai put on 1.1 per cent.

MSCI's broadest index of Asia-Pacific shares outside Japan firmed 0.9 per cent.

On Wall Street, the Dow ended Wednesday with gains of 1.28 per cent, while the S&P 500 rose 1.45 per cent and the Nasdaq 1.52 per cent.

Markets were soothed by Fed Chair Janet Yellen's assurance that future tightening would be "gradual" and dependent on inflation finally moving higher as long forecasted.

The rate forecasts, or dot points, from Fed members were a little higher than many expected with 100 basis points of hikes pencilled in for next year and a terminal rate of 3.5 per cent.

Fed fund futures dipped in response, yet the December 2016 contract implies a rate of only 0.83 per cent, well below the 1.25 to 1.5 per cent favoured by the central bank.

Moves in the Treasury market were also modest. While yields on two-year notes hit their highest since April 2010, they were only up four basis points in all at 1.009 per cent.

Still, that did widen the premium over German yields to 132 basis points, the fattest since late 2006 and a positive draw for the US dollar.

The dollar added 0.9 per cent to 98.839 against a basket of major currencies, and looked set for another test of stiff resistance around the 100.00 mark.

The euro dropped to US$1.0848 having fallen from US$1.1000 in the wake of the Fed's statement, while the dollar advanced to 122.57 yen.

Richard Franulovich, a currency strategist at Westpac, noted that historically the dollar tended to soften during the start of Fed tightening cycles. Yet he doubted it would last given most other major central banks were very much in easing mode. "A follow-up Fed hike could come as soon as March, aided and abetted by favourable oil price base-effects that will lift inflation almost a per centage point and a potentially mild winter," said Franulovich. "We should see a resumption of the dollar's longer term uptrend as 2016 progresses." Such an outcome would spell further trouble for commodities, making them more expensive when measured in other currencies.

Copper slipped 0.3 per cent and is down 27 per cent lower for the year so far.

Oil prices were subdued having resumed their decline on Wednesday to lose as much as 5 per cent after US government data showed a big, surprise build in crude inventories.

Brent eased another 10 cents to US$37.27 a barrel, after shedding US$1.16 on Wednesday. US crude inched up 2 cents to US$35.54 but that followed a loss of 4.9 per cent the day before.

REUTERS