The dollar took a tumble and Asian stocks rose to one-year highs on Wednesday after surprisingly weak U.S. services sector activity put paid to already slim chances of an interest rate hike by the Federal Reserve as early as this month.
MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.4 percent, extending its chunky gains of 2.7 percent over the last two days.
Japan’s Nikkei slid 1.0 percent, however, as the yen gained sharply versus the dollar, putting more pressure on exporters in the world’s third-largest economy.
The Institute for Supply Management’s index of non-manufacturing activity fell to 51.4, its lowest level since February 2010, from 55.5 the month before and well shy of the 55 estimate.
Given the strength in the service sector has been making up for softness in the manufacturing in the past year or so, the data was a blow to the case for the Fed to raise interest rates as soon as this month.
“The Fed now looks certain to keep rates on hold this month,” said Shuji Shirota, head of macro economics strategy group at HSBC in Tokyo.
Comments from several Fed officials in recent weeks had boosted bets on a rate hike in coming months, but investors have had to scale back their expectations since Friday’s weaker-than-expected U.S. payrolls report.
“Recent hawkish comments from Fed officials were probably intended to warn markets against being too complacent about the chance of a rate hike, rather than to make markets fully price in a rate hike,” Shirota said.
U.S. bond yields fell, with policy-sensitive two-year notes yield falling to 0.730 percent, its lowest since Aug. 19, down from 0.853 percent marked on Aug. 29.
U.S. interest rate futures price <0#FF:> gained to indicate only about 15 percent chance of a rate hike this month and just over 50 percent even by December, compared to above 20 and 60 percent, respectively, before the data were released.
Declining U.S. yields undermined the dollar against other currencies and precious metals.
The dollar slumped 1.38 percent on the yen on Tuesday and fell another 0.4 percent to 101.58 yen in early Wednesday trade.
The yen gained additional support from a media report that the Bank of Japan’s board is struggling to agree on a common front in its planned policy review.
The euro rose 0.96 percent against the dollar, the biggest daily gain in three months on Tuesday and last stood at $1.1247.
A resurgent British pound rose to near eight-week high of $1.3445 on Tuesday and held firm at $1.3424 in early Asian trade.
Gold rallied to $1,352.4 per ounce to near three-week highs on Tuesday, and last stood at 1,349.9.
Oil prices kept some distance from three-week lows touched last week, maintaining a part of gains made after Saudi Arabia and Russia agreed on Monday to cooperate in world oil markets, saying they will not act immediately but could limit output in the future.
Brent crude futures stood at $47.24 per barrel, little changed on the day but up slightly so far this week and above its low last week of $45.32.