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Asian shares gain, dollar soft as Fed calms inflation fears

Asian shares rose on Wednesday and the U.S. dollar languished near multi-month lows after U.S. Federal Reserve officials reaffirmed a dovish monetary policy stance, reassuring investors worried about the prospect of rising inflation.

European share markets were set to follow suit, with pan-region Euro Stoxx 50 futures up 0.37% in early deals. German DAX futures gained 0.41% and FTSE futures were fractionally in postive territory.

U.S. stock futures pointed to a higher open on Wednesday with S&P 500 e-minis up 0.32% at 4,198.75.

Richard Clarida, the Fed's vice chair, said on Tuesday that the U.S central bank would be able to curb an outbreak of inflation and engineer a "soft landing" without throwing the country's economic recovery off track.

All the same, Clarida's comments reflect a shifting tone at the Fed. A month ago, Fed Chair Jerome Powell said it was "not yet" time to even contemplate discussion of policy tapering, but more recently policymakers have acknowledged they are closer to debating when to pull back some of their crisis support for the U.S. economy.

A similar shift was evident in New Zealand, where the central bank held interest rates at a record low on Wednesday, but hinted at a hike as early as September next year. The prospect of higher rates sent the New Zealand dollar soaring more than 1%.

That uncertainty weighed on U.S. stocks overnight, with the Dow Jones Industrial Average down 0.24%, the S&P 500 off 0.21% and the Nasdaq Composite 0.03% lower.

But in Asia, the soothing Fed comments helped to boost sentiment.

"The messages were not necessarily new but they reinforced the prevailing consensus still that the bulk of the surprise in April (CPI) can be traced to transitory elements," said Stefan Hofer, chief investment strategist at LGT in Hong Kong.

"The proof is in the pudding so to speak over the coming months, how much of the CPI increase is structural and how much of it is transitory. And the jury is I would say still out on that, but the Fed is sticking to its guns and markets seem to be by and large still comfortable with that."

U.S. consumer prices increased more than expected in April as booming demand amid a reopening economy pushed against supply constraints.

MSCI's broadest index of Asia-Pacific shares outside Japan rose more than 0.5% to over two-week highs, while Tokyo's Nikkei advanced 0.42%.

Taiwan shares added 0.12% and Hong Kong's Hang Seng index rose 0.85%. Chinese blue-chips were up 0.24% after posting their biggest daily gain in nearly 11 months on Tuesday on easing inflation fears and a strong yuan.

On Wednesday, China's onshore and offshore yuan strengthened to near three-year highs against the dollar, with the onshore currency breaking through a key level that had prompted state banks to step in a day earlier.

The dollar index dipped 0.11% to 89.608 after touching its lowest level since Jan. 7 on Tuesday. The greenback was barely changed against the yen at 108.78 and the euro ticked up 0.07% to $1.2258.

Analysts at Jefferies (NYSE:JEF) said regional equity markets could benefit, especially given a weak dollar could help boost global trade and emerging markets by lowering global prices of goods and services.

"A weak dollar should underwrite emerging market performance despite very mixed vaccine roll-outs to date," they said in a note.

"Until the U.S. government declares the pandemic is over and job growth is running at one million plus per month, tapering is unlikely to happen...In the meantime, real rates will be heavily negative. Moreover, based on the dollar's Real Effective Exchange Rate, the greenback cannot be described as being 'cheap'."

The benchmark U.S. Treasury yield edged higher after falling to multi-week lows on Thursday on easing inflation concerns and a strong auction of 2-year notes.

The 10-year yield rose to 1.5774%, from a close of 1.564% on Tuesday, but the two-year yield dipped to 0.1485%, from a close of 0.152%.

Oil was little changed as traders weighed expectations of improving demand in the U.S. against the possibility of new supply from Iran. Global benchmark Brent crude was up 5 cents at $68.70 and U.S. crude fell 3 cents to $66.04 per barrel.

Bitcoin gained 2.39% to $39,314.81 despite China's northern region of Inner Mongolia escalating a campaign against cryptocurrency mining on Tuesday, days after Beijing vowed to crack down on bitcoin mining and trading.

Spot gold added 0.2% to $1,903.13 an ounce.

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