Hong Kong: The US dollar dropped to an 11-week low and government bonds rose on Wednesday after the Federal Reserve slashed rates, paving the way for Asian policymakers to take more aggressive steps to support growth.
Stock markets in Japan and South Korea fell, with shares of car manufacturers under fire on faded hopes of an imminent US auto industry bailout, overshadowing strength in sectors sensitive to interest rates.
US Treasuries slid after a sharp rally overnight, but Japanese government bonds climbed, pushing down the 2-year yield to the lowest since February 2006, on growing speculation the Bank of Japan would cut the overnight cash rate from its current low level of 0.3% as early as Friday.
Government bonds rallied after the Fed also said it would use unconventional means to revive the US economy from a deep recession, including buying long-dated Treasuries, as other central banks were expected to slash their benchmark rates, ushering in an unprecedented era of cheap money.
Prospects for lower borrowing costs helped to lift the MSCI index of stocks in the Asia-Pacific region outside Japan to the highest since 11 November, up 2.3% on the day and extending its gains this month to 10.2%.
However, Japan’s Nikkei share average shed early gains and slipped 0.5%, led by a 7% drop in Honda Motor Co. Strength in the yen also walloped exporter stocks already facing weak global demand.
Honda, Japan’s No.2 automaker, was poised to issue its third profit warning in five months, citing huge currency losses and tanking car sales. Automakers everywhere are reeling from a sharp downturn in sales due to a global recession and tight credit, and are under pressure to delay investments and expansion plans.
Hong Kong’s Hang Seng index climbed 0.9%, boosted by property-related stocks such as Sun Hung Kai Properties on hopes for lower borrowing costs.
In an all-out battle to protect the US economy from profit-evaporating deflation, the Fed explicitly said it would take steps to make sure benchmark rates remain low for some time and to keep its balance sheet loaded with debt.