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Shares rise, dollar firms on Fed rate cut expectations

MSCI's broadest index

MSCI’s broadest index of Asia-Pacific shares outside Japan dropped 0.06%, but stayed near the more than 2-year high reached at the start of the week

Shares rose and the dollar firmed on Wednesday, after cautious but encouraging remarks on inflation by Fed Chair Jerome Powell the day before raised expectations for imminent U.S. interest rate cuts.

The pan-European STOXX 600 index gained 0.2% by 0740 GMT, led by advances in travel and leisure shares. MSCI’s broadest index of Asia-Pacific shares outside Japan dropped 0.06%, but stayed near the more than 2-year high reached at the start of the week.

Speculation around the timing of interest-rate reductions has been affecting markets this year, as investors try to ascertain the moment at which policymakers feel they are bringing inflation under control.

The New Zealand dollar slipped on Wednesday after its central bank held its cash rate steady at 5.5% on Wednesday as expected, but signalled confidence inflation was expected to return to its target range of 1% to 3% in the second half.

The kiwi dropped more than 0.7% after the decision and was 0.54% lower at $0.6092, as traders sharply ramped up bets of RBNZ rate cuts later this year.

Them kind of saying the CPI is going to drop back into target in the second half of this year, that CPI expectations could normalise more rapidly, I think that contributed, according to Alvin Tan, head of Asia FX strategy at RBC Capital Markets.

Compared to the more hawkish statement, the tone they had in the May meeting, stood out, Tan added.

Swaps now imply over 30 bps worth of easing in October, as compared to 16 basis points before the outcome.

The Aussie, meanwhile, rallied 0.6% to a more than one-year high against the New Zealand dollar, with the former underpinned by wagers that the next move in Australian rates might be up given inflation is proving stubborn.

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