Fed rate hike: Hong Kong increases base rate; gold, oil rise; dollar loses

The US Federal Reserve raised the rates by 25 basis points

The Hong Kong Monetary Authority on Thursday raised the base rate charged through its overnight discount window by 25 basis points to 1.25 per cent.

The move from Hong Kong's de facto central bank followed the US Federal Reserve's decision to raise interest rates on Wednesday for the second time in three months, a move spurred by steady economic growth, strong job gains and confidence that inflation is rising to the central bank's target.

Hong Kong tracks US rate moves as its currency is pegged to the US dollar.

Shares of banking and property companies will be in the spotlight in Hong Kong as the interest rate increase could raise concerns on the health of their balance sheets.

Including reinvested dividends, the broader Hong Kong stock market has outperformed a sub-index of property and finance companies since the last US rate increase in December.

The city's economy has become more dependent on the mainland at a time when Beijing authorities say meeting a target of 6.5 per cent growth this year won't be easy.

More than three fourths of inbound tourists are from the mainland, a big source of revenue for local companies, and more than half of its trade is with China.

The Hong Kong central bank sets its base rate through a formula that is 50 basis points above the prevailing US Fed Funds Target or the average of the five-day moving averages of the overnight and one-month HIBORs (Hong Kong Inter-bank Offered Rate).

DOLLAR

The dollar nursed bitter losses in Asia on Thursday while sovereign bonds savoured their biggest rally in nine months after the Federal Reserve hiked interest rates, as expected, but signalled no pick-up in the pace of tightening.

The euro got an added bonus when early returns showed the anti-EU party of Geert Wilders won fewer seats than expected in Dutch elections, soothing fears that public opinion was swinging inexorably toward a break-up of the union.

The sigh of relief was heard across Asia as investors had feared faster US hikes and more political upheaval in Europe could spook funds out of emerging markets.

"The Fed makes the world safe for risk until June," said CitiFX strategist Steven Englander. "Buy emerging market FX, equities, commodities."

Somebody seemed to be listening as gold, copper and oil all rallied as the dollar dropped. MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.9 per cent to its highest since mid-2015.

South Korea's market climbed 1.0 per cent but Japan's Nikkei went the other way, easing 0.4 per cent, as a jump in the yen pressured exporters.

The Dow had ended Wednesday with gains of 0.54 per cent, while the S&P 500 added 0.84 per cent and the Nasdaq 0.74 percent.

The Fed lifted its funds rate by 25 basis points to a range of 0.75 per cent to 1.00 per cent, but said further increases would only be "gradual."

Crucially, officials stuck to their outlook for two more hikes this year and three more in 2018, when many had expected an accelerated spate of moves.

Rather, the Fed said its inflation target was "symmetric," indicating that after a decade of below-target inflation it could tolerate a quicker pace of price rises.

That was painful news for bond bears who had built up huge short positions in Treasuries in anticipation of a hawkish Fed.

DOLLAR DOLDRUMS

Yields on two-year notes were down at 1.30 per cent, having fallen 8 basis points overnight in the biggest daily rally since June last year. They had been at their highest since June 2009.

The drop pulled the rug out from the dollar, which sank to a three-week low of 100.510 against a basket of currencies.

The euro was taking in the view at $1.0737, having climbed 1.2 per cent overnight in its steepest rise since June. The dollar suffered similar losses on the yen to huddle at 113.34.

Richard Franulovich, a forex analyst at Westpac, noted history showed a strong positive correlation between the dollar and yields one week after a Fed meeting and the direction and magnitude of the change in the dots from meeting to meeting.

"The absence of any overt hawkish guidance from the Fed and their dots should leave the dollar trading on the back foot over the next month," he said.

The yen and the Swiss franc tended to move the most in the first week, he added, but the impact tended to be longer lasting on the Australian and Canadian dollars.

Indeed, the Aussie currency rose a rousing 2 per cent on Wednesday to stand at $0.7710.

A protracted bout of weakness for the US dollar would be seen as positive for commodities priced in the currency.

Spot gold was up at $1,221.38 an ounce, after enjoying its biggest daily jump since September.

US crude futures rose 25 cents to $49.11 per barrel, adding to a 2.4 per cent gain on Wednesday. Brent gained 32 cents to $52.13, after rising more than a dollar overnight.

GOLD

Gold prices rose to a one-week high on Thursday as the dollar fell after the US Federal Reserve stuck to a less hawkish stance on further interest rate hikes this year.

Spot gold rose 0.3 per cent to $1,222.20 per ounce, the highest since March 7, at 0028 GMT. US gold futures climbed 1.72 per cent to $1,221.3.

Holdings of SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, rose 0.53 per cent to 839.43 tonnes on Wednesday from 834.99 tonnes on Tuesday.

The US Federal Reserve raised interest rates on Wednesday for the second time in three months, a move spurred by steady economic growth, strong job gains and confidence that inflation is rising to the central bank's target.

However, the central bank said in its policy statement that further hikes would only be "gradual," with officials sticking to their outlook for two more rate hikes this year and three more in 2018.

The dollar wallowed at a one-month low early on Thursday after the Fed sounded less hawkish, while the euro stood tall as Dutch election exit polls gave the country's prime minister a big lead over his far-right rival.

The dollar index against a basket of major currencies extended losses from the previous day, when it slid more than 1 per cent, to touch 100.490, its lowest since Feb. 17.

OIL

Crude oil prices rose on Thursday in early Asian trading, extending gains from the previous session after official data showed US stockpiles had eased from record highs.

Prices surged on Wednesday after a slew of market reports and official data offered some hope that a near three-year global glut in oil is coming to an end, albeit more slowly than many anticipated.

US West Texas Intermediate (WTI) crude was up 28 cents, or 0.6 percent, at $49.14 a barrel by 0010 GMT, having surged 2.4 per cent in the previous session to settle at $48.86, its first increase in eight days.

Brent futures climbed 34 cents, or 0.7 percent, to $52.15. They had their first increase in seven days on Wednesday, gaining 1.7 percent.

The benchmarks have bounced off their lowest levels since the Organization of the Petroleum Exporting Countries (OPEC) agreed at the end of last year to cut crude production, with an initial surge evaporating as stockpiles remained high.

Data from the US Energy Information Administration (EIA) showed US crude stocks fell last week, the first weekly decline after nine straight increases.

Crude inventories fell 237,000 barrels in the week to March 10. Analysts had forecast an increase of 3.7 million barrels. 

The inventories have been closely watched by oil traders to determine whether the OPEC agreement to cut output is reducing the global glut.

Oil bulls were also encouraged after the International Energy Agency said in its monthly oil report that demand should overtake supply in the first half of this year.