Asian Stocks Decline as Dollar Strengthens Amid U.S. Rate Expectations

By Ankur Banerjee

SINGAPORE - Asian stock markets experienced a downturn on Wednesday. The strength of the U.S. dollar has kept other currencies like the yen, yuan, and euro at low levels, as traders speculate that the Federal Reserve (Fed) is unlikely to make rapid rate cuts. This speculation follows recent data indicating stability in the U.S. economy.

MSCI's broadest index, which tracks shares in the Asia-Pacific region excluding Japan, fell by 0.5%. Over in the U.S., all major stock indexes ended the day lower, driven by concerns about a potential rise in inflation as noted by the latest economic reports.

The negative sentiment is expected to persist into European markets, with Eurostoxx 50 futures declining by 0.3% and German stocks down by 0.18%. Furthermore, rising bond yields are anticipated to put pressure on technology stocks in Europe after reaching a more than five-month peak on Tuesday.

Investor attention has shifted to the evolving expectations surrounding U.S. interest rates. This shift is influenced by the differing monetary policies among countries and the looming threats of tariffs as new political leadership approaches in the U.S.

The Fed's forecasts from December indicated only two potential rate cuts for 2025, down from an earlier prediction of four. Current market pricing suggests even less, with expectations for a first rate cut not fully factored in until July.

In contrast, the European Central Bank is expected to implement substantial rate cuts, with traders forecasting around 99 basis points of easing in the current year, even as inflation in the eurozone surged in December.

As a result, the euro is nearing a two-year low against the dollar, having recently traded at approximately $1.035375. Investors are concerned that the euro may drop to the significant $1 mark this year amid tariff uncertainties.

The Japanese yen was recorded at 158.12 per dollar, having previously touched 158.425, which is a level not seen since Tokyo intervened to support the yen last July. The yen depreciated by more than 10% against the dollar last year and continues to struggle as we begin 2025.

In China, the blue-chip index has dropped over 1%, marking a three-month low, reflecting a hesitant start to the year where regulators have attempted to calm investor fears without much success.

Meanwhile, Hong Kong's shares observed a decline of over 1%, hitting their lowest levels since late November, while the Chinese yuan reached a new 16-month low.

Impact of U.S. Economic Data

Tuesday's economic data revealed an unexpected increase in U.S. job openings for November, but hiring rates softened, indicating that while the labor market is slowing, it isn't deteriorating fast enough to urge the Fed to cut rates quickly.

According to Kyle Chapman, an FX markets analyst, "It is too soon to claim a resurgence in inflation from this data, with markets awaiting more substantial clues from Friday's non-farm payrolls report." He expects that the current market sentiment, biased toward only one rate cut this year, may allow for a reversal in the overly hawkish expectations surrounding the Fed's monetary policy.

The benchmark 10-year Treasury yields peaked at 4.699% following the data release, the highest level since April, and were last reported at 4.681%. This movement led to an increase in the dollar index (DXY), which measures the U.S. currency against six others, reaching 108.65, not far from the two-year high achieved last week. The dollar index gained 7% in 2024 due to expectations that U.S. interest rates will remain elevated for a longer duration.

All eyes are now set on the upcoming payrolls report due this Friday, as investors look to this data for hints on when the Fed might consider rate cuts. The non-farm payrolls report is expected to show an increase of 160,000 jobs in December, a reduction from November's much stronger gain of 227,000 jobs, based on a Reuters survey.

James Knightley, chief international economist at ING, noted that the combination of moderate growth, lingering inflation concerns, and a labor market that is slowing rather than collapsing continues to pressure the market to lower its expectations for rate cuts this year. He highlighted that stronger job numbers and persistent inflation could further alter these market predictions.

Looking ahead, the U.S. inflation report for December is scheduled for release on January 15.

Commodity Market Movements

On the commodities front, oil prices are on the rise, with Brent crude increasing by 0.67% to $77.57 per barrel. U.S. West Texas Intermediate (WTI) crude saw a jump of 0.85%, reaching $74.88 a barrel. Gold prices remained steady at $2,649 per ounce, although they are under pressure from the stronger dollar and rising bond yields.

Stocks, Dollar, Fed, Economy, Currencies