Dollar lifted by yield surge, Asia stocks slugged
SYDNEY (Reuters) - The dollar notched an 11-month top on the yen on Thursday as stunningly strong US economic data drove Treasury yields to their highest since mid-2011, while Asian stocks were pressured as borrowing costs rose at home.
Higher US yields are anything but favorable for emerging markets as they tend to draw away much-needed foreign funds while pressuring local currencies.
Bond prices fell across Asia and long-term Japanese yields reached ground not visited since early 2016, a market tightening not warranted by domestic economic conditions.
“A simple dynamic is playing out in the global economy right now - the US is booming, while most of the rest of the world slows or even stagnates,” said HSBC economist Kevin Logan.
“A Federal Reserve that is raising rates to prevent the US economy from overheating is constraining the policy options of countries where financial conditions are tightening and trade tensions intensifying.”
MSCI’s broadest index of Asia-Pacific shares outside Japan skidded 1.1 percent in response, with South Korea, the Philippines, Indonesia and Taiwan all down.
Even the Nikkei eased 0.2 percent, as rising yields offset the boost to exporters from a weaker yen.
The dollar had taken off after an influential survey of the US services sector showed activity at its strongest since August 1997, sparking speculation the payrolls report on Friday could also surprise.
“The (ISM) index was significantly above the long-term average during periods of growth and consistent with the upside risks to growth,” said Kevin Cummins, senior US economist at NatWest Markets.
“At a minimum, these data suggest that labor demand remains very strong.”
Federal Reserve Chairman Jerome Powell declared the economic outlook was “remarkably positive” and said rates might rise above “neutral”, currently anywhere from 2.5 to 3 percent.