The dollar surged to a two-decade high, while Asian currencies – and stocks – sank on Thursday, after investors were unnerved by the Federal Reserve’s hawkish outlook for US interest rates.
Bearish bets on most Asian currencies rose to record highs, driven by a towering dollar and mounting pressure on the Chinese yuan, which has slipped to a more than 27-month low.
Short positions on the yuan, the South Korean won, Singapore dollar and the Taiwanese dollar all hit their highest on record, according to a fortnightly poll of 11 respondents prior to the conclusion of the Fed’s two-day policy meeting on Wednesday.
The Fed hiked interest rates by 75 basis points for a third straight time and forecast rates rising at a faster pace and to a higher level than investors had expected, sending the dollar to a new peak against a basket of currencies.
The rates outlook is helping drive the dollar higher as US yields look attractive and investors think other economies look too fragile to sustain rates as high as those contemplated in the United States.
Japan and China are the outliers and their currencies are sliding particularly hard – with the yen falling to the weaker side of 145 per dollar in early trading on Thursday as the Bank of Japan stuck with its ultra-easy monetary policy.
Later, the yen shot up after officials intervened in the forex market for the first time since 1998 to bolster the battered currency.
The dollar fell over 1% to 142.3 yen, after trading earlier at more than 1% higher against the Japanese currency. It was last down 0.42% at 143.4.
Yields in Japan’s government bond market also retreated as speculators closed some bets on imminent policy changes.
Yuan Faces Biggest Loss Since 1994
Meanwhile, the PBoC has been setting firmer-than-expected daily yuan midpoint fixings since late August to contain the currency’s weakness.
It has also lowered the amount foreign financial institutions must hold as reserves, and warned the market of strong one-way bets against the yuan.
But the currency still looks set for its biggest annual loss since 1994, when China unified official and market exchange rates.
The onshore yuan finished the domestic session at 7.0810 per dollar, its weakest close since June 18, 2020.
The Thai baht, Malaysian ringgit and the won have slid to multi-year lows recently, while the Philippine peso fell to a record low on Thursday.
The euro fell to a 20-year low in the Asia session, the yen to a 24-year trough and sterling to its lowest since 1985. Russia’s move to mobilise reservists for war in Ukraine added to the sombre mood.
Bucking the regional trend, short positions on the Indian rupee fell to a six-week low, supported by foreign flows into local debt and equity markets.
Asian Stocks Down
Asian stocks, measured by MSCI’s broadest index of Asia shares outside Japan dropped 1.4% to a two-year low. Japan’s Nikkei was 0.5% lower, but it found some support after the Bank of Japan stuck to its dovish policies.
Pan-European futures were last down 1.9% and FTSE futures down 0.9%. S&P 500 futures fell 0.5%.
“I think stock markets were still hoping the Fed would show some sign of halting the rate hikes at some point, but there was no sign of it,” Nomura strategist Naka Matsuzawa said in Tokyo.
In the rates market, short-term yields remain on the rise and the peak for the benchmark Fed funds rate a moving target.
The median of Fed officials’ own outlook has US rates at 4.4% by year’s end – 100 bps higher than their projection in June – and even higher, at 4.6%, by the end of 2023.
Futures have scrambled to catch up. The yield on two-year Treasuries hit a 15-year high of 4.1320% on Thursday. Ten-year yields are below that, at 3.5477% as traders price in the hikes’ damage to longer-run growth.
“No one knows whether this process will lead to a recession or if so how significant that recession would be,” Fed chair Jerome Powell told reporters after the rate hike announcement.
“The chances of a soft landing are likely to diminish to the extent that policy needs 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 those came through during the Asian trading day.
Bank Indonesia increased interest rates by 50 basis points to 4.25% – more than expected – as it sought to rein in inflation after the government raised subsidised fuel prices earlier this month, while also supporting the rupiah.
The Philippines central bank, Bangko Sentral Ng Pilipinas, also hiked its policy rate by 50 basis points.
The Swiss National Bank raised its policy 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 “gradual”, which weakened the crown currency.
Norges Bank said it would probably hike again in November, but its rate path forecasts suggested a smaller increase, economists said.
The central bank’s monetary policy committee raised the sight deposit rate to 2.25% from 1.75%, having signalled in August that a September hike was likely, but without indicating by how much.
And traders see an 80% chance of a 75 bps hike from the Bank of England.
But these moves are not that much of a salve for national currencies, since Sweden’s crown is at a record low despite the country’s steepest rate hike in a generation this week.
The dollar’s rise has sent emerging market currencies tumbling and punished 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 steadied at $90.33 a barrel after sliding on demand worries.
Sterling hit a 37-year low of $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 at $0.6602 and the kiwi down 0.4% at $0.5832.
“The Fed is not going to stop any time soon,” said Sally Auld, chief investment officer at wealth manager JB Were in Sydney. “What else do you buy except for the US dollar at the moment?”
- Reuters with additional editing by Jim Pollard
NOTE: This report was updated on September 22, 2022 with further details such as rate hikes by other central banks and Japan’s intervention in the forex market.