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Dollar crunched by cautious Fed, bonds and commodities cheer

By Wayne Cole

SYDNEY (Reuters) – The dollar nursed sharp losses in Asia on Thursday while sovereign bonds savored their biggest rally in nine months after the Federal Reserve hiked interest rates, as expected, but signaled no pick-up in the pace of tightening.

The euro got an added bonus when early returns showed the anti-EU party of Geert Wilders won fewer seats than expected in Dutch elections, soothing fears that public opinion was swinging inexorably toward a break-up of the union.

The sigh of relief was heard across Asia as investors had feared faster U.S. hikes and more political upheaval in Europe could spook funds out of emerging markets.

“The Fed makes the world safe for risk until June,” said CitiFX strategist Steven Englander. “Buy emerging market FX, equities, commodities.”

Somebody seemed to be listening as gold, copper and oil all rallied as the dollar dropped. MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.9 percent to its highest since mid-2015.

South Korea’s market climbed 0.6 percent, but Japan’s Nikkei dipped 0.1 percent as a jump in the yen pressured exporters.

Shanghai stocks <,SSEC> added 0.6 percent with investors seemingly untroubled as China’s central bank raised short-term rates for the third time in as many months.

The Dow had ended Wednesday with gains of 0.54 percent, while the S&P 500 added 0.84 percent and the Nasdaq 0.74 percent.

The Fed lifted its funds rate by 25 basis points, as expected, to a range of 0.75 percent to 1.00 percent, but said further increases would only be “gradual.”

Crucially, officials stuck to their outlook for two more hikes this year and three more in 2018, when many had expected an accelerated spate of moves.

Rather, the Fed said its inflation target was “symmetric,” indicating that after a decade of below-target inflation it could tolerate a quicker pace of price rises.

That was painful news for bond bears who had built up huge short positions in Treasuries in anticipation of a hawkish Fed.