Dollar firm, shares ease in Asia as Fed hike looms

The dollar held broad gains on Friday as the risk of an imminent U.S. interest rate hike slugged sovereign bonds and commodities, even managing to sour Wall Street`s party as the reality of rising borrowing costs began to sink in. 

Asian stock markets were mostly lower, with MSCI`s broadest index of Asia-Pacific shares outside Japan off 0.4% and Australia down 1%.

Japan`s Nikkei eased just a fraction, with a weaker yen helping limit the losses. A chorus line of Fed officials singing of the need for higher rates has seen the implied probability of a move this month shoot to 74%, from just 30% at the start of the week. 

Fed Chair Janet Yellen and Vice Chair Stanley Fischer are both due to speak later on Friday and are expected to stick to the same tune.

"The U.S. dollar has been snapped up across the board as a March Fed hike is heavily priced in," said Sean Callow, a senior currency strategist at Westpac.

"All it took was about a hundred comments from Fed officials, but markets have finally decided that "fairly soon" means less than two weeks and that perhaps 3 hikes this year means 3 hikes this year."

That was enough to make even Wall Street pause, and the Dow fell 0.53%, while the S&P 500 lost 0.59% and the Nasdaq 0.73%.

Caterpillar was among the biggest casualties, shedding 4.2% on news that federal law enforcement officials searched its Illinois facilities.

The prospect of a Fed hike on March 15 saw yields on two-year Treasury notes shatter their recent range to reach ground last trod in mid-2009.

With the European Central Bank still acting to suppress short-term euro rates, the spread between U.S. and German two-year yields yawned out to 214 basis points, the widest since early 2000 and up from a low of 183 in January.

That shoved the euro down to $1.0505 and set up a test of major support at the February low of $1.0492. The dollar likewise climbed to 114.37 yen and nearer to the recent peak of 114.95. Against a basket of six major currencies, the dollar was firm at 102.130 after touching its highest since Jan. 11.

That strength was not good news for commodities priced in dollars with everything from gold to copper taking a hit.

Gold was down at $1,232.61 an ounce after suffering its biggest one-day decline since December.

Oil prices took an extra blow after Russian crude production remained unchanged in February, showing weak compliance with a global deal to curb supply to tighten the oversupplied market. Early Friday, U.S. crude was up 6 cents at $52.67, having shed more than 2% on Thursday, while Brent was yet to trade at $55.08 per barrel.