By Wayne Cole
SYDNEY (Reuters) – Asian shares rallied on Thursday as speculation the U.S. Federal Reserve might opt to not raise interest rates at all this year hammered the dollar & sparked a huge rally in oil prices.
By some measures the U.S. currency suffered its largest one-day percentage drop outside of the crises of 1998 & 2008, symptomatic of just how crowded bullish positions had been.
p>The sudden reversal provided a much-needed boost to beleaguered commodities, sending oil up no less than 8 percent, & easing pressure on energy shares & risk appetite.
That relief showed in equity markets where MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> jumped 1.9 percent. Australia's resource-heavy index <.AXJO> rose 1.7 percent & South Korea <.KS11> 1 percent.
In China, the Shanghai Composite Index <.SSEC> gained 1.8 percent as trade wound down ahead of the Lunar holidays. Hong Kong stocks <.HSI> leaped 1.7 percent, in part because the U.S. dollar's fall lessened strains on the HK dollar's peg.
Japanese investors, however, seemed less pleased with the yen's newfound strength against the dollar & nudged the Nikkei <.N225> down 0.7 percent.
Wall Street had taken its cue from oil & recouped early losses on Wednesday, in a wild session that saw the Dow swing in a 420-point range.
The Dow <.DJI> ended Wednesday up 1.13 percent, while the S&P 500 <.SPX> added 0.5 percent & the Nasdaq Composite <.IXIC> eased 0.28 percent.
Traders were unsure what triggered the dollar rout though many pointed to comments from Federal Reserve Bank of New York President William Dudley that tighter financial conditions would be taken into account at the next policy meeting in March.
In an interview with Market News International, Dudley moreover warned that a sharp rise in the dollar could have "significant consequences" for the U.S. economy.
Investors took that to mean the Fed did not want to see the currency rise any further & might delay further increases in interest rates. Futures markets had already priced out almost any chance of a hike in March & imply a funds rate of just 0.51 percent by December <0#FF:>.
The current effective funds rate is 0.38 percent.
The impact was amplified by a surprisingly soft reading on the U.S. services sector, just the latest in a string of disappointing economic indicators.
The market reaction was swift & violent with the dollar collapsing through a host of key chart levels & triggering waves of stop-loss selling.
Early Thursday, the dollar was down at 118.02 yen <JPY=> having shed 1.7 percent overnight in its biggest daily drop since August.
The fall wiped out all the gains from the Bank of Japan's decision to cut its rates below zero, a tit-for-tat response that only added to market suspicions central banks were engaged in a war of competitive depreciations.
Against a basket of currencies, the dollar was pinned at 97.351 <.DXY>, after shedding 1.6 percent on Wednesday. The euro was enjoying the view at $1.1085 <EUR=>, having climbed 1.7 percent on Wednesday.
The drop was a boon to commodities priced in U.S. dollars, lifting everything from copper to gold to oil.
Brent futures <LCOc1> put on another 30 cents to $35.34 a barrel, on top of a 8.4 percent gain overnight. U.S. crude <CLc1> added 36 cents to reach $32.64.
Spot gold <XAU=> was up at $1,141.00 an ounce & near its strongest since Oct. 30.
(Reporting by Wayne Cole; Editing by Eric Meijer & Shri Navaratnam)
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