Expectations that the Federal Reserve is moving closer toward printing more money to support the U.S. economy lifted both stocks and bonds on Wednesday, while the dollar fell to a six-week low against the euro on a dwindling yield advantage.
Gold was in sight of $1,300 an ounce, having hit a record high overnight after the Fed said it was ready if needed to add more stimulus and that inflation was running below where it would like it to be.
Asia ex-Japan stocks rose 0.7% to a near two-year high, though trading volumes were thinned out by holidays, while U.S. stock futures climbed 0.5%.
The increasing possibility that the Fed will buy Treasuries to stimulate demand lifted government bonds, while the prospect of investors having access to even more cheaply borrowed money supported riskier investments such as equities.
"The FOMC seems to be considering more bond purchases predominantly because of concerns over deflation and not over growth. In consequence, Asian risky assets should benefit from the additional liquidity rather than suffering from weakening prospects for regional exports to the United States," Dariusz Kowalczyk, senior economist and strategist at Credit Agricole CIB in Hong Kong, said in a note.
The falling dollar pushed up the yen and kept traders on high alert for signs that Japan was intervening in markets again to push its currency back down.
Japanese Prime Minister Naoto Kan said intervention in the foreign exchange markets would be "unavoidable" if there was a drastic change in the currency. He also told the Financial Times in an interview that Tokyo planned a "total" package of measures that would boost domestic demand and help to weaken the currency. The dollar fell 0.3% against the yen to 84.87 yen just below where traders had thought Japan's central bank would support it.
Japanese authorities intervened in currency markets last Wednesday to weaken the yen for the first time since 2004, but the dollar has met selling pressure from exporters around 86 yen. Tokyo has not been seen in the market since.
DOLLAR OUTLOOK DARKENS
The euro rose to $1.3310 the highest since August 6, while the dollar weakened across the board.
"I doubt the market will step back from selling the U.S. dollar much for the time being until the U.S. data starts to improve," said Greg Gibbs, currency strategist at Royal Bank of Scotland in Sydney.
The relatively high yielding Australian and New Zealand dollars outperformed other liquid currencies, rising 0.3% and 0.4%, respectively, with dealers focusing on the widening yield advantage of these countries against U.S. bonds.
The 10-year U.S. Treasury future was up 0.3% while in the cash market, the benchmark 10-year yield slipped 3 basis points compared with late on Tuesday in New York to 2.55%.
The spread of the U.S. 10-year yield over the German 10-year yield has shrank to a negligible 8 basis points from around 40 basis points only two weeks ago.
The Fed's statement increased expectations the Bank of Japan could also ease policy further, pushing up Japanese government bonds. The 10-year JGB future was up 0.3 points in mid session trade.
Japan's Nikkei share average was largely unchanged on the day, though it has risen around 9% so far in September. Those returns were roughly level with the U.S. S&P 500 index but exceeded the FTSEurofirst 300's 5% gain.
The MSCI index of Asia Pacific stocks outside Japan was at its highest since April 15. The index has climbed 10% in September.
However, some Asian exchange-traded funds, which have been receiving heavy inflows, may be near a peak.
"We believe inflows are likely to slow, as many of these ETFs are now technically overbought. In addition, we expect ETFs investing in Japan and Taiwan to continue to underperform their Asian peers due to persistent outflows," TrimTabs Investment Research said in a research report.
Equity trading volumes in Asia could be light on Wednesday with markets closed in China, South Korea and Taiwan because of public holidays.
