Asian shares rise, dollar strengthens as interest rate cut expectations fade – Apr 2, 2024

Asian shares rose on Tuesday and the dollar strengthened, leaving the yen near the 152 per dollar level, raising concerns among traders about possible interventions, while expectations faded that the Federal Reserve was close to cutting interest rates.

Data on Monday showed the U.S. manufacturing sector grew in March for the first time in 1-1/2 years as manufacturing rebounded sharply and new orders increased, highlighting the strength of the economy and raising questions about the timing of rate cuts by the Fed.

The robust manufacturing data sent U.S. Treasury yields higher, with two- and 10-year yields rising to two-week highs, boosting the dollar.

MSCI’s broadest index of Asia-Pacific shares outside Japan was 0.65% higher, while Japan’s Nikkei reclaimed the 40,000-point mark and was last up 0.41%.

The yen was last at 151.715 per dollar, not far from the 34-year low of 151.975 it hit last week, with traders keeping a close eye on hints of intervention from Japanese authorities.

“The continued string of robust U.S. data is making life increasingly uncomfortable for Japanese currency officials trying to support the yen,” said Tony Sycamore, market analyst at IG.

“It also means that a mitigating event (physical intervention) is unlikely to occur until the 152.00 level is breached.”

Tokyo intervened in the currency market in 2022, first in September and again in October, as the yen slid to 152 against the dollar, levels last seen in 1990.

Japanese Finance Minister Shunichi Suzuki said on Tuesday that authorities were prepared to take appropriate action against excessive volatility in the currency market, without ruling out options.

Chinese shares were mixed, with the blue chip index largely flat, while Hong Kong’s Hang Seng Index rose more than 2% after gaining as the financial hub reopened after a holiday on Monday.

Chinese shares posted their biggest daily gain in a month on Monday as the latest manufacturing activity data showed the economy’s recovery is gaining momentum.

Last night, the S&P 500 kicked off the first session of the second quarter on a muted note, weighed down by concerns about the timing of rate cuts after stronger-than-expected manufacturing data pushed Treasury yields higher. The index posted its biggest percentage gain in five years in the first quarter.

The 10-year Treasury yield fell 2.4 basis points to 4.305% in Asian hours, after hitting a two-week high of 4.337% in the previous session.

The yield on the two-year U.S. Treasury note, which usually moves with interest rate expectations, fell 2.5 basis points to 4.693% on Tuesday, not far from the two-week high reached in the previous session of 4.726% .

High interest rates led to a general rise in the dollar, with the euro down 0.11% to $1.0731 and the British pound last at $1.2541, down 0.07% on the day.

Against a basket of currencies, the dollar was 0.038% higher at 105.05, just below the four-and-a-half month high of 105.07 it hit on Monday after stronger-than-expected data.

Markets now expect a 61% chance that the Fed will cut rates in June, up from 70% a week earlier, according to the CME FedWatch Tool. They also expect a 68 basis point cut this year, down from last week’s 75 basis points.

“Markets may have overreacted to the huge ISM manufacturing numbers, given Fed Chair Powell’s emphasis on scaling back policy restrictions later this year,” said Nicholas Chia, Asian macro strategist at Standard Chartered.

“If core PCE inflation eases to 2.5%-2.6% by the June meeting, then rate cuts could be in play, opening the door to some USD weakness. The risk is that the Fed fails to reach unanimity on cuts, giving US yields and the USD a new boost.”

In commodities, US crude rose 0.3% to $83.96 a barrel and Brent was at $87.72, up 0.34% on the day, helped by signs of improved demand and rising tensions in the Central East.

Spot gold fell 0.1% to $2,248 an ounce after hitting a record high of $2,265.49 on Monday.