The U.S. dollar plumbed a near 3-year low against other major currencies on Wednesday
before a Federal Reserve decision, which is expected to reinforce an ultra-easy policy stance and drive more capital to buoyant emerging Asian stock markets.
While Fed chairman Ben Bernanke is expected to paint a cautious picture on the world's largest economy, Asian and Latin American central banks by contrast are still tightening monetary policy and some are using currency appreciation to check price
pressures.
The European Central Bank raised its policy rate this month for the first time since mid-2008 and is expected to raise rates at least once more this year. That has given new legs to the "carry trade", in which investors borrow in a low-yielding currency to invest in
higher-yielding assets or currencies. Investors have been snapping up the high-yielding Australian dollar and South Korean shares , while showing heavy interest in Indonesia's upcoming dollar bond.
Market players also added to bearish dollar bets, especially
against the euro and the Swiss Franc , on expectations the Fed will cling to a near-zero interest rate policy even as it lets a $600 billion bond purchase program wind
down in June. "Focus will be on the inaugural press conference
and whether Bernanke is shifting along the dove-hawk scale,"
said Michael Sneyd, analyst at Societe Generale. "Attention will also be on comments for how the Fed may respond to U.S. fiscal tightening. All-in-all, the meeting is
likely to give the green light for risk appetite and for dollar bears to continue to be bearish." The dollar index , which tracks its performance against a basket of major currencies, hit the lowest since August 2008 at 73.483, before cutting some losses.
FLOWS PICK UP
Asian shares rose after robust gains posted by
U.S. indices overnight, driven by better-than-expected
performances from U.S. corporate heavyweights. U.S. stock
futures rose 0.1 percent <SPc1>, suggesting a higher open on
Wall Street. South Korea's benchmark KOSPI index rose to a record
high for the third consecutive session before giving back some
gains as investors took profits on automaker shares. It ended
flat. Hong Kong shares rose, boosted by a broad rally in
financials ahead of results from Chinese banks.
MSCI's index of Asia Pacific shares outside Japan
rose to its highest level since January 2008,
and was up 0.5 percent on the day. Japan's Nikkei closed up 1.4 percent, supported by
rebounding shares of large exporters. But it could face downward
pressure after ratings agency Standard & Poor's revised its
outlook on Japan's sovereign debt to negative. Offshore flows into non-developed Asian markets have picked up after a January slump, with both emerging markets equity and
bond fund groups extending their longest inflow streaks since
mid-January, according to fund tracker EPFR Global.
The order book for Indonesia's eagerly awaited 10-year
dollar-denominated bond has grown to around $5 billion for an
issue expected to be between $1 billion to $1.5 billion in size,
IFR said. Indonesia's markets have been a favourite among global
investors because of the country's relatively high yields,
decent economic growth and demographics.
China let the yuan rise to a post-2005
revaluation high, triggering gains in emerging Asian currencies.
Helping the case of carry trades, the Australian dollar shot
to a new 29-year peak above the $1.0800 per U.S. dollar after
higher-than-expected first quarter inflation suggested the
central bank will eventually have to resume tightening.
SILVER PULLBACK
The dollar's woes have been further compounded by a recent
drop in U.S. Treasury yields as rate traders bet that any Fed
tightening would be a slow and gradual process.
In Asian time, the U.S. 10-year note yield was
at 3.32 percent, just above a one-month low of 3.31 percent
before the Fed decision. Ten-year yields are down by about 30
basis points since this month's highs.
In commodity markets, spot silver bounced
0.9 percent to around $46 per ounce level after falling by
nearly 5 percent overnight. High volatility and the expiry of
U.S. silver options added to the intensity of the decline of the
precious metal. Despite the sharp pullback in silver which rippled over into
other commodities, Brent <LCOc1> held above the $124 per barrel
line, as Libya's civil war and violence-tinged unrest Syria and
Yemen helped limit bearish sentiment on a price slide.
