Asia shares slip after Fed signals Dec rate hike

MSCI's broadest index of Asia-Pacific shares outside Japan slid 0.7 percent. Japan's Nikkei, bucked the trend and climbed 2.2 percent as the yen weakened against the resurgent dollar. (A man looks at an electric quotation board displaying the Nikkei key index of the Tokyo Stock Exchange in Tokyo on August 26, 2016. Tokyo stocks ended the week in the red August 26 as dealers awaited a speech by Federal Reserve chief Janet Yellen and after data showed Japan is still struggling in its battle to kickstart inflation. - AFP)

TOKYO: The U.S. dollar shone while Asian shares slipped slightly on Thursday after the U.S. Federal Reserve announced a plan to start shrinking its balance sheet and signaled one more rate hike later this year.

MSCI's broadest dollar-denominated index of Asia-Pacific shares outside Japan was down 0.4 percent. South Korea's Kospi was down 0.1 percent while Australia shed 0.6 percent.

Japan's Nikkei gained 0.8 percent thanks to the yen's fall against the dollar.

U.S. share prices recovered quickly from initial losses following the Fed's announcement, with the S&P 500 <.SPX> ending slightly higher, adding to a string of closing records.

As widely expected, the Federal Reserve announced it would begin in October to trim its massive holding of U.S. Treasury bonds and mortgage-backed securities acquired in the years after the 2008 financial crisis.

The Fed signaled it still expects one more interest rate hike by the end of the year, despite a recent bout of low inflation, but ratcheted down its long-term interest rate forecasts.

Fed fund rate futures are pricing in about 65 percent chance of a rate hike by December, the highest level since March, and around 50 percent before the Fed meeting. Markets expect the Fed move will in December when it is due to revise its economic projections.

The yield on two-year U.S. Treasury notes jumped to 1.451 percent , its highest level since November 2008. The 10-year U.S. Treasuries yield rose to 2.278 percent, briefly hitting a six-week high of 2.289 percent.

"The markets reacted to the Fed quite straightforwardly, with shorter yields rising more than long-dated bond yields. The bond markets have fairly strong conviction that low inflation and low growth will persist," said Hiroko Iwaki, senior strategist at Mizuho Securities.

In the currency market, the rise in Treasury yields boosted the dollar's attractiveness. The euro dropped to $1.1873 from above $1.20 just before the Fed's policy announcement.

Likewise the dollar jumped to 112.595 yen , a two-month high, from around 111.30. The Bank of Japan is widely expected to keep monetary policy unchanged when it wraps up its two-day policy review later on Thursday.

Gold fell to $1,296.1 per ounce on Wednesday, its lowest level in more than three weeks, and last stood at $1,128.6.

Oil prices flirted with multi-month highs, despite a rise in U.S. crude inventories, after the Iraqi oil minister said OPEC and its partners were considering extending or deepening output cuts, ahead of the planned meeting between OPEC and non-OPEC nations on Friday.

Brent crude futures rose to a five-month high of $56.48 a barrel and last stood at $56.16.

U.S. benchmark West Texas Intermediate (WTI) crude futures hit a four-month high of $50.79 per barrel and last traded at $50.71, flat from the U.S. close on Wednesday. - Reuters