By Kosaku Narioka and Rebecca Thurlow
Asian stocks outside of Japan fell after the U.S. Federal Reserve raised interest rates for the first time in a year and pointed to a faster pace of increases than was previously expected, a stance that sent the dollar shooting up against other currencies.
The sharp rise in the dollar against the yen gave shares in Japan a strong lift, but equities markets in Australia, New Zealand and South Korea all lost ground as Asia-Pacific investors took a more cautious view on higher rates and softer currencies.
While Japan's Nikkei Stock Average was recently up 0.9%, Australia's S&P/ASX 200 wasdown 0.7% and New Zealand's NZX-50 index was 0.2% lower. South Korea's Kospi was also down 0.3%. Markets elsewhere in Asia were also expected to open down.
The Fed's move to raise rates was well communicated ahead of time, but the signaling of faster rate increases over the coming year took markets by surprise. Fed officials said they would increase the federal-funds rate by a quarter percentage point to between 0.50% and 0.75%, a move consistent with a brightening economic outlook.
David Lane, wealth-management director at Pitcher Partners, said the Fed has changed its tone on inflation costs and that could negatively affect equity markets, while the underlying economic reasons for the change in tone are positive--the U.S. economy is growing.
"Investors had become somewhat comfortable with the subdued rate outlook. Now that the Fed is firmly in rate rise mode, this will challenge equities valuations," he said.
Grant Williamson, investment adviser at Hamilton Hindin Greene, said other Asian stock indexes may slip, but the reaction isn't likely to be dramatic.
"I think it's pretty much signaled, so there might be a little bit of profit-taking across the board but I'm not expecting any reasonable size declines in the Asian markets today."
Chris Weston, chief market strategist at IG in Melbourne, said the dollar strength is unlikely to be welcomed by Chinese companies who have to borrow from debt markets to help fund recently announced acquisitions, which could affect Chinese stock markets today.
"We're obviously keeping an eye on the [yuan] fix as this may cause more angst in emerging market assets," Mr. Weston said.
Japanese stocks were higher after the Fed move boosted the dollar to a fresh 10-month high against the yen.
"The initial reaction is a buy, but the longer-term outlook isn't clear, " said Hideyuki Ishiguro, senior strategist at Daiwa Securities. "We'd have to think about the adverse effects of rate increases such as possible capital outflows from emerging economies. When U.S. interest rates go up, there might also be some negative effects on the economy."
The Fed now expects the median fed-funds rate to be 1.4% by the end of 2017, reaching 2.1% at the end of 2018 and 2.9% in 2019. That implies three quarter-percentage-point rate increases over each of the next three years, a faster pace than officials projected in September, when they only saw two rate increases next year.
The U.S. dollar climbed to as high as 117.62 yen in Asia after trading around Yen115.0 ahead of the Fed announcement. The dollar was also sharply higher against the Australian, Canadian and New Zealand dollars.
"Some of the [Fed] members are taking on board the prospect of more growth-supportive and inflationary fiscal policy next year," said Ray Attrill, the global head of currency strategy at National Australia Bank.
Still, Fed Chairwoman Janet Yellen has also indicated that it is too early to make assumptions about what might happen to the world's largest economy if the budgetary purse strings in Washington are loosened next year, Mr. Attrill added.
Richard Grace, the global head of currency strategy at the Commonwealth Bank of Australia, said the Fed is navigating its way through some tricky waters. Ms. Yellen has acknowledged the potential for stronger gross domestic product growth if a big infrastructure spend by the incoming Trump administration becomes a reality, while also acknowledging that monetary conditions have tightened in the past month through a higher U.S. dollar and big increases in U.S. bond yields, he said.
James Glynn and Robb M. Stewart contributed to this article.
Write to Kosaku Narioka at firstname.lastname@example.org and Rebecca Thurlow at email@example.com
(END) DowJones Newswires
December 14, 2016 20:04 ET (01:04 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.