The U.S. dollar dropped to an 11-week low and government bonds rose on Wednesday after the Federal Reserve slashed rates, paving the way for Asian policymakers to take more aggressive steps to support growth.
Regional stocks rose, supported by sectors sensitive to interest rates but shares of car manufacturers were under fire as hopes of an imminent U.S. auto industry bailout faded and Japan's Honda Motor Corp cut its profit forecast for the third time in five months.
European stock futures pointed to a higher open, while Wall Street was set to start the day a bit lower after gaining in the wake of the Fed decision.
U.S. Treasuries dipped after a steep rally overnight, but Japanese government bonds rose, pushing down the 2-year yield to the lowest since February 2006, on growing speculation the Bank of Japan would cut the overnight cash rate from its current low level of 0.3 percent as early as Friday.
"This opens the door for more rate cuts in Asia. Everyone is now looking at the Bank of Japan, which may feel compelled to cut rates for some symbolic gesture," said David Cohen, director of Asian economic forecasting with Action Economics in Singapore.
Prospects for lower borrowing costs helped to lift the MSCI index of stocks in the Asia-Pacific region outside Japan to the highest since Nov. 11, up 2.3 percent on the day and extending its gains this month to 10.2 percent.
However, Japan's Nikkei share average shed early gains and finished 0.5 percent lower as strength in the yen walloped exporter stocks already facing weak global demand.
Hong Kong's Hang Seng index climbed 1.5 percent, boosted by property-related stocks such as Sun Hung Kai Properties on hopes for lower borrowing costs.
In an all-out battle to protect the U.S. economy from profit-evaporating deflation, the Fed cut its base rate to a range of zero to 0.25 percent, said it would take steps to make sure benchmark rates remain low for some time and keep its balance sheet loaded with debt.
DOLLAR'S FORTUNES TURN
The prospect of effectively littering the financial system with dollars kept the U.S. currency struggling. The rally it enjoyed earlier this month on the back of U.S. investor capital flows back home has clearly faded.
"People are getting a little concerned with the whole idea of quantitative easing. To the extent that means simply throwing more dollars on to the market, then that implies a weakness in the currency," said Dwyfor Evans, currency strategist with State Street Global Markets in Hong Kong.
The euro hit a high near $1.42 before settling back to $1.4060. So far this month, the euro has strengthened by around 14 cents as dealers close out bets on the dollar as the year-end approaches.
The dollar fell 0.3 percent against the yen compared to late U.S. trading to 88.70 yen, creeping back down toward a 13-year low of 88.10 yen hit late last week.
Commodities were boosted by a weaker dollar, with copper futures edging higher and oil rising to above $44 a barrel on expectations OPEC will cut supplies further.
BOND YIELDS STAY LOW
Data reflecting a worsening global economic recession have kept demand for government bonds high, especially heading into the year-end. However, expectations that other central banks will follow the Fed's lead and aggressively cut rates as well as pour liquidity into particular areas desperate for cash has increased hunger for government paper.
The benchmark 10-year Japanese government bond yield dropped to the lowest since mid-April at 1.29 percent. The 2-year yield dropped to the lowest since February 2006, though a rise in the 2-year U.S. Treasury yield increased its advantage over Japan to 24 basis points. On Tuesday, the spread was the lowest since 1992, according to Reuters data.
U.S. Treasuries sold off in Asia, but only after yields hit record lows overnight in the wake of the Fed's actions.
The 10-year note yield edged up to 2.27 percent after hitting 2.26 percent on Tuesday, the lowest since 1951, according to Global Financial Data. The yields on 2-year and 30-year U.S. paper fell to record lows.
Given the moves in U.S. yields, some investors were moving back to the short end of the yield curve from longer maturities and becoming more interested in investment grade corporate debt.
"Corporations are susceptible to both a credit crunch and an economic downturn, but should perform well if and when economic catastrophe is avoided and as trading volumes gradually improve," said Mike Zelouf, product specialist at Western Asset Management, a part of Legg Mason.
