Emerging Asian stocks tumbled to multi-month lows on Thursday while currencies weakened against a strong dollar, as risk aversion prevailed after the U.S. Federal Reserve signalled a slower pace of rate cuts in the coming year.
The MSCI index of international emerging markets equities dropped as much as 1.6%. MSCI's emerging markets currency index fell 0.5% to its lowest level in more than four months.
The U.S. central bank cut interest rates on Wednesday as expected, but Chair Jerome Powell said more reductions in borrowing costs now hinged on further progress in lowering stubbornly high inflation.
The hawkish tilt from the Fed sent traders heavily dialling back easing expectations next year and pushed the dollar to a near two-year peak.
"Powell's pivot back to price stability risks has seen the markets rapidly unwind expectations on further cuts next year, pushing yields and the U.S. dollar higher and tightening financial conditions meaningfully across the globe - kryptonite for EM asset prices," said Kyle Rodda, senior financial market analyst at Capital.com.
South Korea's won, which had already been weighed down by a domestic political turmoil, dropped 1% to its weakest level in 15 years.
The Indian rupee declined past 85 to the U.S. dollar for the first time, while the Malaysian ringgit retreated 0.8%.
The Indonesian rupiah fell more than 1% in its seventh straight session of losses, despite the central bank holding interest rates steady as it focused on supporting the currency.
Bank Indonesia said it would act to stabilise the currency against any excessive volatility and Thailand's central bank said it will ensure that the baht is not too volatile, while the Reserve Bank of India likely intervened to support the rupee.
Maybank analysts cautioned that the dollar rally faces downside risks in the near term, as markets often overshoot after the Fed's validation, only to be corrected by subsequent data.
Regional stocks tumbled as well, with those in Jakarta dropping as much as 2.2% to their lowest point in nearly six months.
Stocks in India and Taiwan slipped 0.9% and 1%, respectively.
Manila equities slumped as much as 2% to their lowest levels since late-June, before paring some losses to last trade down 1.1% after the Bangko Sentral ng Pilipinas cut its rates by 25 bps for the third consecutive time, as expected.
Among other emerging markets, Brazil's real tumbled to a record low as financial markets put the Brazilian government's spending plans and wide budget deficit to the test.
HIGHLIGHTS:
** BOJ keeps rates steady, hawkish board member dissents
** Hong Kong central bank cuts interest rate, tracking Fed move - Reuters
