Asian Shares Up, Dollar Firms as US Rate Cut Wagers Recede

GLOBAL MARKET - SINGAPORE. Asian stocks rose on Tuesday while the dollar firmed, keeping the yen rooted near the 152-per-dollar level that has traders worried about possible intervention, as expectations the Federal Reserve was close to cutting interest rates faded.

Data on Monday showed U.S. manufacturing grew for the first time in 1-1/2 years in March as production rebounded sharply and new orders increased, highlighting the strength of the economy and casting doubts on the timing of Fed rate cuts.

The robust manufacturing data sent yields on U.S. Treasuries higher, with two-year and 10-year yields climbing to two-week peaks, boosting the dollar.

Futures indicated European stock markets were set for a subdued open, with Eurostoxx 50 futures up 0.10%, German DAX futures up 0.02% and FTSE futures 0.07% higher.

Japan's Nikkei was volatile. It reclaimed the 40,000 points mark in the morning session but was last flat, below the mark.

The yen was slightly weaker at 151.76 per dollar, not too far from the 34-year low of 151.975 it touched last week, with traders keenly watching for hints of intervention from Japanese authorities.

"The continued run of robust U.S. data is making the lives of Japanese currency officials attempting to support the yen increasingly uncomfortable," said Tony Sycamore, market analyst at IG.

"It also means that a smoothing event (physical intervention) is unlikely to occur until after the 152.00 level breaks."

Tokyo intervened in the currency market in 2022, first in September and again in October, as the yen slid toward 152 to the dollar, a level last seen in 1990.

Japanese Finance Minister Shunichi Suzuki said on Tuesday that authorities were ready to take appropriate action against excessive currency market volatility.

MSCI's broadest index of Asia-Pacific shares outside Japan was 0.65% higher, mainly due to Hong Kong stocks. The Hang Seng Index was up more than 2%, catching gains as the financial hub reopened after public holidays on Friday and Monday.

Chinese stocks eased on Tuesday after clocking their biggest daily gain in a month on Monday, as the latest manufacturing activity data signalled the country's economic recovery is gaining traction.

Overnight, the S&P 500 kicked off the first session of the second quarter on a quiet note, weighed by worries over the timing of interest rate cuts after stronger-than-expected manufacturing data pushed Treasury yields higher. The benchmark U.S. index had clocked the biggest first quarter percentage gain in five years.

The yield on 10-year Treasury notes eased to 4.309% on Tuesday, having touched a two-week high of 4.337% in the previous session.

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was down 2.5 basis points at 4.693% on Tuesday, not far from the near two-week high of 4.726% touched in the previous session.

The elevated yields broadly lifted the dollar, with the euro down 0.11% to $1.0731 and sterling last at $1.2541, down 0.07% on the day.

Against a basket of currencies, the dollar was 0.048% higher at 105.05, just shy of the 4-1/2 month high of 105.07 it touched on Monday after the stronger-than-expected manufacturing data.

Markets are now pricing in a 61% chance of the Fed cutting rates in June, compared with 70% a week earlier, according to the CME FedWatch Tool. They are also pricing in 68 basis points of cuts this year.

"Markets may have over-reacted to the blowout ISM manufacturing numbers, considering the Fed chair Powell's insistence on dialing back policy restraint later this year," said Nicholas Chia, Asia macro strategist at Standard Chartered.

"If core PCE inflation eases to 2.5%-2.6% by the June meeting, rate cuts could be in play which open the door to mild USD weakness. The risk is that the Fed fails to reach unanimity on cuts, providing another leg up to US yields and the USD."

In commodities, U.S. crude rose 0.51% to $84.14 per barrel and Brent was at $87.85, up 0.49% on the day, aided by signs of improved demand and rising Middle East tensions.

Spot gold added 0.3% to $2,256.46 an ounce, after hitting an all-time high of $2,265.49 on Monday.