By Ankur Banerjee

Asian Stocks Slip Amid Fed and BOJ Decisions

SINGAPORE (Reuters) – Asian stocks declined and the dollar held near a two-year high on Thursday following the U.S. Federal Reserve's warning to slow down the pace of rate cuts next year. The Bank of Japan (BOJ) maintained steady rates, as expected.

The yen fell to a one-month low of 155.43 per dollar in the wake of this decision, having dropped over 8% against the dollar this year, marking a potential fourth consecutive year of decline.

The BOJ's choice comes as the yen hovers near the 155 per dollar level, within a range of 139.58 to 161.96 held throughout the year amid a robust dollar and significant interest rate disadvantages, despite the Fed's recent cuts.

Investors are now keenly awaiting comments from BOJ Governor Kazuo Ueda to evaluate not just the timing but also the scale of forthcoming rate hikes. Current market expectations suggest 44 basis points of BOJ hikes anticipated by the end of 2025.

Ueda is scheduled to hold a press conference at 0630 GMT to elucidate the decision. However, board member Naoki Tamura proposed raising interest rates to 0.5%, citing burgeoning inflation risks, a proposal that was ultimately dismissed.

Ben Bennett, an Asia-Pacific investment strategist at Legal and General Investment Management, remarked, "The hawkish Fed dot plot overnight gave the BOJ an option to increase rates, and there was one dissenting vote for a 25 bps hike, indicating early rate increases in 2025."

Following the Fed's hawkish adjustment, Wall Street encountered a downward shift, with Asian stocks reflecting this trend; MSCI's broadest index of Asia-Pacific shares outside Japan fell by 1%. The Japanese Nikkei index also declined by 1%, while Australian shares dropped nearly 2%.

The Dow Jones Industrial Average saw a plunge exceeding 1,000 points.

The central banks' policy decisions highlighted the challenges facing the global economy as the U.S. prepares for leadership under President-elect Donald Trump in the coming year.

Fed Chair Jerome Powell noted that officials were considering the potential impacts of Trump's policies, including increased tariffs and tax reductions, on their monetary strategies, while Ueda identified Trump’s approaches as a potential risk in a prior interview.

Rob Thompson, macro rates strategist at RBC Capital Markets, stated, "The risks inherent, partially unspoken, involve potential inflationary pressures from the Trump administration. If the market perceives that the Fed's easing cycle is complete, whether due to Trump's actions or rising inflation, there exists a risk of repricing towards hikes in the future. This suggests that market sentiment may still be somewhat complacent regarding these risks."

Fed Jolts Markets

The Fed executed a rate cut on Wednesday as anticipated; however, Powell's cautious commentary on future policy sent markets into a downturn. U.S. central bankers now foresee only two quarter-percentage-point rate reductions by the conclusion of 2025, a decrease in easing expectations from prior months.

Prashant Newnaha, a senior Asia-Pacific rates strategist at TD Securities, noted, "The Fed's hawkish stance exceeded our predictions, but today’s policy guidance aligns with our expectations of a prolonged pause in 2025. The most significant surprises were primarily related to inflation forecasts, indicating that higher rates could persist for an extended period."

The shift in Fed rate cut expectations propelled the dollar index to its highest value since November 2022, peaking at 108.15 in early Thursday trading.

U.S. benchmark 10-year Treasury yields reached a seven-month high of 4.524% before settling at 4.514%.

In the cryptocurrency market, bitcoin briefly dipped below the $100,000 mark after Powell indicated no intention for the central bank to engage in substantial bitcoin acquisition efforts.

The British pound remained stable at $1.25835, ahead of a Bank of England policy announcement where the central bank is expected to maintain current interest rates despite signs pointing to an economic slowdown.

Gold prices experienced a rise of 0.8%, sitting at $2,609 per ounce.