Stocks rally and dollar drop on hopes Fed rates have peaked

Stocks and oil prices rose while the dollar weakened Thursday as a much-needed burst of confidence flows across world markets after the Federal Reserve hinted it has come to the end of its long-running interest rate hiking cycle.

Asian traders picked up the baton from their Wall Street counterparts, who welcomed what was seen as a dovish stance by the central bank and its governor, while data suggesting its tightening measures were taking hold provided extra support.

The bank said it would pause rates -- now at a two-decade high -- for a second straight meeting as officials wanted to assess the impact of more than a year of hikes, while boss Jerome Powell warned there was still some time before inflation was brought to heel.

However, while he left the door open to more increases down the line, he said that "tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring and inflation".

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Analysts said Powell's use of "financial" was significant, as it acknowledged that it was not just credit that was tightening, with surging Treasury yields being seen as financial markets helping the Fed do its heavy lifting.

"Some might take this as a sign that the bond market will continue to help them with this tightening cycle, which could support the argument that a peak in rates is in place," said OANDA's Edward Moya.

The pause comes after the Fed began hiking rates early last year to combat surging inflation in the wake of the Ukraine invasion, tight supplies and supply chains and a surge in post-Covid demand for goods.

Since peaking at more than seven percent in June 2022, inflation as measured by the Fed's favoured yardstick has slowed by more than half -- although it remains stuck firmly above three percent.

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'End of its cycle'

Observers said investors were left sceptical that the bank would lift borrowing costs again, even after Powell said decision-makers kept the possibility alive.

The news out of Washington sent 10-year Treasury yields down by 20 basis points, helped by the Treasury's decision to slow the pace of increases in its long-term bond sales, meaning it will issue less debt.

All three main indexes rallied in New York, with the Nasdaq and S&P 500 up more than one percent as below-forecast jobs growth and manufacturing activity were cheered as a sign that the economy and labour market were slowing enough to drag on inflation.

And Asia was in an equally buoyant mood.

Hong Kong, Tokyo, Shanghai, Sydney, Singapore, Seoul, Taipei, Jakarta and Wellington were all sharply higher.

"While Powell tried to signal a hawkish hold, there was a sense that the Fed has come to an end of its rate hike cycle, with little being read out of the strong third-quarter gross domestic product report or the blowout September jobs numbers," said Saxo's Redmond Wong.

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The drop in rate hike expectations -- some put the chances of a December lift at about 20 percent, from 30 percent previously -- saw the dollar fall against its peers.

Notably, it eased to just above 150 yen, having surged towards a three-decade high 152 at one point this week after a Bank of Japan policy tweak fell short of what some had forecast.

The prospect of a softer dollar and easier financial conditions for companies pushed up crude, which is priced in the greenback.

The commodity had been falling in recent days on hopes that the Israel-Hamas conflict would not spill out into the wider region, which had fanned fears of a supply shock.

Key figures around 0230 GMT

Tokyo - Nikkei 225: UP 1.1 percent at 31,954.48 (break)

Hong Kong - Hang Seng Index: UP 1.7 percent at 17,383.95

Shanghai - Composite: UP 0.2 percent at 3,028.64

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Dollar/yen: DOWN at 150.15 yen from 150.89 yen on Wednesday

Euro/dollar: UP at $1.0596 from $1.0573

Pound/dollar: UP at $1.2192 from $1.2150

Euro/pound: DOWN at 86.90 pence from 87.00 pence

West Texas Intermediate: UP 1.0 percent at $81.27 per barrel

Brent North Sea crude: UP 1.0 percent at $85.45 per barrel

New York - Dow: UP 0.7 percent at 33,274.58 (close)

London - FTSE 100: UP 0.3 percent at 7,342.43 (close)

Source: AFP