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Asian Stocks Drop But Currencies Gain Ahead of Fed

With trading disrupted by Golden Weeks in China and Japan, investors have cast their gaze to Washington, sending Asian currencies higher and stocks down.
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Asian markets lost ground on Wednesday, with interest rates dominating investor minds, ahead of the U.S. Federal Reserve's decision and after a surprise rate hike from the Australian central bank on Tuesday.

The Reserve Bank of Australia took traders by surprise with a 25-basis-point rate hike Tuesday, when markets were pricing in a pause. So, too, they have priced in a final 25-basis-point increase from the Fed Wednesday.

The Hang Seng Index in Hong Kong fell 1.2%, with the Kospi in South Korea down 0.9%. The Straits Times dipped 0.6% in Singapore, and Taiwan stocks fell 0.5%. Stock markets in Japan and China are closed.

The decision Down Under takes Aussie rates to 3.85%. The RBA was hawkish in its mindset, hinting that "some further tightening" may be necessary to make sure inflation comes back in line within a "reasonable timeframe."

The latest decision takes Australian interest rates to their highest levels in more than a decade. The 375 basis points of increase since May 2022 represents the fastest that rates have ever risen in Australia. Not since 2012, when the RBA was trying to correct the impact of stimulus coming out of the 2008 banking crisis, have rates been this high.

Inflation in Australia dipped from a 33-year peak of 7.8% at the end of 2022 to 7.0% at the end of Q1. But it is still far too high for the RBA's liking, with the central bank targeting a 2-3% range. The RBA only expects it to come into line by around mid-2025.

The Australian rate setters are concerned that such a long period of high inflation could lead to something more pernicious setting in. Economists are split on whether the RBA will raise rates again in Q3.

The Aussie dollar gained modest ground against the greenback, strengthening 1.2% immediately after the decision despite the expectation that the Fed will raise Wednesday.

Australian stocks have lost 2.0% since Monday's close, in the form of the S&P/ASX 200 index, which fell 1.0% today. It's been very choppy trade in Sydney while the RBA has been raising rates, every rally undone by inflation and the hawkishness of the central bank. Six rallies have given way, leaving Sydney stocks down 3.2% from where they began May 2022.

The U.S. dollar has lost ground Wednesday against most Asian currencies. The yen has gained 2.0% since Tuesday, moving from almost ¥138 to just above ¥135 to the U.S. dollar. The greenback is down 0.3% today against the Taiwan dollar and Korean won, and 0.2% against the Singapore dollar, with a similar loss against the Indian rupee and Indonesian rupiah.

The currency moves show that traders expect the Fed to pause after this rate hike, taking the legs out from under the U.S. dollar. But manufacturing data out of China, South Korea and Taiwan this week suggest the economic recovery in Asia is patchy, even weak, faced with lackluster demand in the West as higher borrowing costs bite.

Many Asian markets were closed on Monday for Labor Day. Markets remain shuttered in mainland China and Vietnam through Wednesday but resume on Thursday. Tokyo stocks aren't trading Wednesday for Constitution Memorial Day, and remain closed the rest of this week. Both Japan and China have a "Golden Week" when many people are on holiday.