Asia Stocks, Oil Drop; Dollar Gains as Fed Raises Discount Rate

Asian stocks, U.S. stock futures and oil declined while the dollar gained as the Federal Reserve unexpectedly raised its discount rate, spurring concern the global recovery will slow as stimulus programs are unwound.

The MSCI Asia Pacific Index dived 1.6 percent to 115.94 as of 12:25 p.m. in Tokyo, with banks and commodity stocks leading the decline. The dollar advanced to a nine-month high against the euro and the strongest in five weeks versus the yen. Oil dropped for the first time in four days. Standard & Poor’s 500 index futures expiring in March slid 1.1 percent.

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The Fed’s move to raise the discount rate from 0.5 percent to 0.75 percent marks another step by the Fed in a gradual retreat from its unprecedented actions to halt the deepest financial crisis since the Great Depression. Singapore said its economy will expand faster than initially expected this year, adding to evidence of a sustained regional recovery that has prompted policy makers to end some stimulus measures.

“The U.S. has started moving toward the exit of stimulus measures,” said Kenichi Hirano, general manager and strategist at Tokyo-based Tachibana Securities Co. “Though it’s necessary, the move is making investors jittery and is a short-term negative for the market.”

Hong Kong’s Hang Seng Index slumped 2.4 percent, while Japan’s Nikkei 225 Stock Average lost 0.7 percent. The Kospi Index fell 1.7 percent in Seoul as YTN television reported North Korea declared a firing zone off its west coast near the maritime border with South Korea.

NAB, Cnooc Decline

National Australia Bank Ltd., Australia’s fourth-largest bank, fell 3.2 percent to A$25.11 after reporting first-quarter profit that was unchanged from a year ago. Trend Micro Inc., the world’s third-biggest maker of security software, sank 4.9 percent to 3,195 yen in Tokyo after forecasting lower profit this quarter.

Commodity companies fell as oil, gold and copper prices slumped. Cnooc Ltd., China’s largest offshore oil producer, declined 2.9 percent to HK$11.90 and PetroChina Co., the country’s biggest oil company, dropped 2.1 percent to HK$8.53.

Lihir Gold Ltd. slipped 3.2 percent to A$2.70 in Sydney. RBC Capital was among brokerages that cut its rating on the Australian stock exchange’s second-largest gold mining company, which reported earnings yesterday.

The dollar rose to as high as $1.3444 per euro, the strongest since May 18 and to 92.09 against the yen, the highest since Jan. 12.

“The Fed’s action came as a surprise and enhanced speculation that it will withdraw stimulus ahead of major peers,” said Tomokazu Matsufuji, a dealer in Tokyo at SBI Liquidity Market Co., a unit of financier SBI Holdings Inc. “This will drive the dollar higher.”

Bonds Climb

U.S. and Japanese government bonds climbed amid concern policy makers will accelerate removal of stimulus measures, prompting declines in stocks and increased demand for the relative safety of debt.

Treasuries also gained as investors snapped up 10-year yields at a five-week high.

The yield on the benchmark 10-year note fell two basis points, or 0.02 percentage point, to 3.79 percent, according to BGCantor Market Data. The rate earlier climbed to 3.82 percent, matching the highest level since Jan. 12.

South Korea’s won weakened 0.8 percent to 1,159.7 per dollar as the discount rate increase cooled demand for higher- yielding currencies. The Indonesian rupiah and the won gained 30 percent and 28 percent respectively in the past year as near- zero rates in the U.S. gave traders cheap financing for investing in developing nations. The rupiah dropped 0.5 percent to 9,360 per dollar.

‘Knee-Jerk’ Selling

“We’ve seen a knee-jerk sell-off in most currencies against the U.S. dollar and that includes Asia,” said Mitul Kotecha, head of global foreign-exchange strategy for Credit Agricole CIB in Hong Kong. “We’ll see a bigger impact on the currencies more sensitive to risk, like the Korean won and Indonesian rupiah.”

The Fed said the increase in the discount rate will encourage financial institutions to rely more on money markets, rather than the central bank, for short-term loans. It was the first increase in the discount rate in more than three years, and the move widens the discount rate spread over the top range for the federal funds rate to 0.5 percentage point.

The central bank also cited last month’s statement, which said economic conditions are likely to warrant “exceptionally low” levels of the federal funds rate, or the target rate for overnight loans between banks, for “an extended period.”

‘Further Normalization’

“These changes are intended as a further normalization of the Federal Reserve’s lending facilities,” the central bank said yesterday in a statement. “The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy.”

Singapore’s gross domestic product will increase 4.5 percent to 6.5 percent in 2010 after shrinking 2 percent last year, the trade ministry said in a statement today. That compares with a previous prediction for growth of 3 percent to 5 percent this year. The economy contracted an annualized 2.8 percent from the previous three months last quarter after climbing a revised 11.5 percent from July to September.

Oil declined as much as 1.4 percent to $77.95 a barrel in New York, paring yesterday’s 2.2 percent gain as the dollar advanced and a U.S. Energy Information Administration report showed crude stockpiles climbed 3.09 million barrels last week. A rise of 1.73 million barrels was forecast, according to the median estimate in a Bloomberg News survey.

Dollar-denominated commodities fell as the U.S. currency strengthened. Three-month copper on the London Metal Exchange declined as much as 0.9 percent to $7,200.50 a metric ton. Gold for immediate delivery dropped as much as 0.8 percent to $1,099.41 an ounce.

“There are few incentives for gold buying at the moment as the rising dollar continues to keep investors away,” said Hwang Il Doo, a senior trader with KEB Futures Co. in Seoul.

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