The Fed holds a two-day meeting ending on Wednesday at which it is widely expected to hike interest rates. The focus is on whether the Fed thinks the U.S. economy is robust enough to withstand further rate increases through 2017.
A rate hike accompanied by a message suggesting that the Fed may raise rates more than expected in 2017 would support the dollar but be negative for equity markets.
“Political events like the UK election and Comey’s testimony are over and the focus this weeks shifts to monetary policy,” said Junichi Ishikawa, senior forex strategist at IG Securities in Tokyo.
“The equity markets and the dollar have mostly priced in the Fed signalling three rate hikes in 2017. That explains why U.S. equities have held up. But if the Fed hints at more than three hikes, that could trigger a sell-off in equities that many are bracing for.”
MSCI’s broadest index of Asia-Pacific shares outside Japan was down 0.1 percent following a mixed day Friday on Wall Street where the Nasdaq .IXIC slid 1.8 percent on tumbling technology shares but the Dow .DJI closed at yet another record high.
MSCI’s Asia-Pacific index was still in reach of a two-year high scaled late last week.
Japan’s Nikkei .N225 was down 0.5 percent and South Korea’s KOSPI slid 0.5 percent. Australian markets were closed for a public holiday.
Equities navigated through last week’s potential landmines events relatively unscathed.
Congressional testimony by former FBI Director James Comey caused few ructions, and the fallout of Britain’s surprise parliamentary election result, at which the ruling party lost the majority, was mostly contained to the pound.
Sterling was down 0.05 percent at $1.2734 GBP=D4 after sliding 1.7 percent on Friday, when it plumbed a near two-month low of $1.2636.
The dollar index against a basket of currencies was little changed at 97.255 following its rise on Friday to a 9-day high of 97.500.
The U.S. currency received support as Treasury yields, which marked seven-month lows early last week at the height of investor jitters towards the UK elections and Comey’s testimony, continued their bounce ahead of the Fed’s anticipated rate hike.
In commodities, crude oil prices extended gains after rising on Friday when a pipeline leak in major producer Nigeria overshadowed supply worries that have been weighing on the market.
U.S. crude and Brent were both 0.35 percent higher at $45.99 and $48.32 a barrel, respectively. – Reuters