US-China Meeting, Asian Stocks and Currencies Rise on China's Rate Cut News

"Easing US-China Tensions and Fed's Hawkish Tone Lead to Dollar Strength"

"Global Investors Reducing Allocation in Dollar-Denominated Assets"

Asian Pacific stocks mostly rose following news of a meeting between the US and China, and the announcement of a rate cut and stimulus measures by China's central bank.

On the 7th (local time), Hong Kong's Hang Seng Index closed up 0.5%, and China's mainland CSI300 rose 0.61% to close at 3,831.63. South Korea's KOSPI increased by 0.55% to 2,573.8 points. Japan's benchmark Nikkei 225 index fell 0.14% to 36,779.66 points, down 0.14%.

Futures of New York Stock Exchange indices, which had fallen the previous day, rose around 5:30 AM Eastern Standard Time, with S&P 500 futures up 0.6% and Nasdaq 100 futures up 0.7%.

Expectations grew with the news that US Treasury Secretary Scott Besant, along with US Trade Representative (USTR) Greer, will hold talks with the Chinese side in Switzerland this weekend. Treasury Secretary Besant stated that the focus of this meeting would be on easing tensions rather than reaching an agreement. In contrast, China emphasized a cautious stance, stating "actions speak louder than words."

Bloomberg's Dollar Index rose 0.3% on news of the US-China trade talks. Bloomberg's Dollar Index rose 0.3% on news of the US-China trade talks. As of 5 AM Eastern Standard Time, the 10-year Treasury yield rose more than 1 basis point (1bp=0.01%) to 4.335%, and the 2-year Treasury yield rose 3 basis points to 3.826%. Spot gold fell 1.5% to $3,381.50 per ounce compared to the previous trading day.

Since last weekend, Asian currencies, led by the Taiwan dollar and Hong Kong dollar, surged against the dollar. However, as the dollar recovered and China's rate cut weakened the yuan to 7.2164 yuan per dollar, the Taiwan dollar and South Korean won also fell, partially calming the strength of Asian currencies.

Analysts at the Reserve Bank of Australia stated in a report that "the easing of trade tensions led to a rise in the dollar." They mentioned another possibility that could support the dollar is the Federal Reserve's policy meeting taking place today. They predicted that "if Chairman Powell takes a hawkish tone to assert independence from political influence, the dollar will strengthen."

The Fed is set to decide on interest rates at 2:30 PM Eastern local time (3:30 AM Korean time on the 8th). Following relatively solid US employment data released last week, expectations for a rate cut have diminished.

According to Bloomberg and other foreign media, the market sees little chance of a rate move at this meeting. While the first rate cut of the year was expected in June a month ago, now most expect the first cut in July.

Last month, when President Trump threatened to dismiss Fed Chairman Powell, the dollar and US Treasuries plummeted. After Trump retracted his statement, saying he had no intention of firing him, Treasuries slightly recovered, but news that exchange rates were being discussed in US-Asia trade negotiations led to a renewed dollar weakness.

Meanwhile, currencies and stocks of India and Pakistan, where a new local conflict has begun, also fell.

Peter Kinsella, head of global foreign exchange strategy at Union Bancaire Privée, said in an interview with CNBC, "The decline in confidence in the US dollar suggests that investors are reducing their exposure to the dollar and repatriating capital to their home countries." He also added that global investors outside the US are reducing their allocation in dollar and dollar-denominated assets.

Guest reporter Kim Jung-ah kja@hankyung.com