Japanese stocks dragged down Asian equities following gains on Wall Street as the Federal Reserve signaled it will soon cut interest rates.

A gauge for equities in the region fell Thursday. Japanese shares declined on yen strength, slipping over 3% – led by real estate stocks. Equities in Australia and South Korea edged higher while Chinese stocks fluctuated. Contracts for the S&P 500 and the Nasdaq 100 both climbed to compound Wednesday’s advances ignited by a tech rally.

US equity gains were driven by signs the Fed will cut rates after leaving borrowing costs unchanged in its Wednesday meeting. Notably, the committee shifted to saying it is “attentive to the risks to both sides of its dual mandate,” rather than prior wording focused just on inflation. In a press conference, Fed Chair Jerome Powell said officials could cut rates “as soon as” September.

“A combination of broad US dollar weakness and equity strength led by semiconductor names should be positive for Asian markets,” said Chamath de Silva, head of fixed income at Betashares Holdings in Sydney. Declines for Japan reflect “headwinds in the near term from yen strength on a Fed easing cycle, but I’m fairly constructive on Japanese stocks over the longer term,” he said.
An index of dollar strength had its worst day since May on Wednesday, supporting a rally in emerging markets and Asian currencies excluding the yen, which rallied against the greenback.

The Japanese currency extended gains early Thursday after falling below 150 per dollar on Wednesday, a level not seen since March, after the Bank of Japan raised rates and announced plans to cut bond purchases.

“The Fed finally suggested that the rate cut is likely to come soon, which Asian markets have been waited for a long time,” said Tomo Kinoshita, global market strategist at Invesco Asset Management Japan. “Most of the Asian currencies are likely to gain against the US dollar in the short term.”

The pound was steady ahead of a Bank of England interest rate decision due later Thursday. The central bank is expected to reduce rates by 25 basis points, according to consensus forecasts compiled by Bloomberg, which would be the first cut since the start of the pandemic.

Treasuries fell in early Asian trading to partly unwind a Wednesday rally across the curve. The US 10-year yield fell 11 basis points Wednesday to 4.03%, a level not seen since February. Gains for US debt also reflected reports that Iran had ordered retaliation against Israel for the killing of a Hamas leader on its soil. Australia and New Zealand yields fell early Thursday, tracking gains for Treasuries in the prior session.

In commodities, West Texas Intermediate rose early Thursday to compound its 4.3% advance Wednesday, the biggest daily jump in more than two years. Gold was steady after climbing Wednesday.