By Kosaku Narioka and Rebecca Thurlow

Faster pace of rate hikes takes investors by surprise

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 was down 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," 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 DaiwaSecurities. "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."

(END) Dow Jones Newswires

December 14, 2016 20:51 ET (01:51 GMT)

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