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By Ankur Banerjee
SINGAPORE (Reuters) – Asian stocks fell and the dollar traded near a two-year high on Thursday after the U.S. Federal Reserve warned it would slow the pace of interest rate cuts next year, while the Bank of Japan kept rates steady expected.
The yen weakened, hitting a one-month low of 155.43 per dollar after the decision. The yen has fallen more than 8% against the dollar this year and is poised for a fourth straight year of decline.
The BOJ’s decision comes as the yen hovers around the 155 per dollar level, the weaker end of a range of 139.58 to 161.96 that it has held this year while under pressure despite the Fed’s rate cuts a strong dollar and a large interest rate disadvantage.
Investors’ focus will now be on BOJ Governor Kazuo Ueda’s comments to gauge not only the timing of the next rate hike, but also the magnitude of rate hikes next year. Traders are currently pricing in 44 basis point interest rate hikes from the BOJ by the end of 2025.
Ueda is expected to hold a press conference at 06:30 GMT to explain the decision. Board member Naoki Tamura disagreed and suggested raising interest rates to 0.5% as inflation risks increased, but his proposal was rejected.
“The Fed’s hawkish dot plot overnight gave the BOJ the opportunity to raise rates, and there was a dissenting vote for a 25 basis point hike. So it looks like interest rates will rise in early 2025,” said Ben Bennett, Asia-Pacific investment strategist at Legal and General Investment Management.
The Fed’s hawkish stance sent Wall Street lower and Asian stocks followed suit, with MSCI’s broadest index of Asia-Pacific stocks outside Japan falling 1%. Japan’s Nikkei fell 1%, while Australian stocks fell almost 2%.
The Dow Jones Industrial Average plunged more than 1,000 points. (.N)
The policy decisions by the two central banks underscored the challenge facing the global economy as the largest participant, the United States, comes under the leadership of President-elect Donald Trump at the start of the new year.
Fed Chairman Jerome Powell said some officials are considering the impact of Trump’s plans, such as higher tariffs and lower taxes, on their policies, while Ueda highlighted Trump’s policies as a risk in an interview last month.
“The clearly inherent and partly unstated risks here are what the Trump administration could bring with it in terms of inflationary pressures,” said Rob Thompson, macro interest rate strategist at RBC Capital Markets.
“If the market decides the Fed is done, whether it’s Trump or inflation picks up over the next year, there’s a risk that we’ll adjust prices toward rate hikes later. Did that tell us anything? Yes. The market could still be a problem.” I’m a little complacent about some of these risks.
