Asian stocks slipped on Tuesday while the U.S. dollar held steady. Investors turned cautious ahead of the Federal Reserve’s expected rate cut this week and grew concerned about how U.S. interest rates may evolve next year, especially with signs of division inside the central bank.
Market sentiment remained fragile at the start of the week as traders awaited several major central bank decisions. Investors are seeking clearer direction on where global interest rates are heading in the months ahead.
The Reserve Bank of Australia kept its interest rate unchanged on Tuesday, as widely expected. The bank ruled out further policy easing for now and warned that rates could rise again if inflation remains stubborn. This guidance pushed the Australian dollar close to a three-month high.
Elsewhere, the Swiss National Bank and the Bank of Canada are also expected to hold rates steady this week. Meanwhile, the Federal Reserve is widely projected to cut borrowing costs on Wednesday.
However, markets are paying closer attention to what may follow the Fed’s December rate cut. Bond investors are preparing for a shallow easing cycle, and several major Wall Street banks expect fewer rate cuts in 2026 due to persistent inflation and a stronger-than-anticipated U.S. economy.
MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.65% after a weak session on Wall Street. European futures also pointed to a softer open as caution dominated global markets.
Prashant Newnaha, senior Asia-Pacific rates strategist at TD Securities, noted that risk-management adjustments may be largely complete. He added that Fed Chair Jerome Powell is likely to offer a more cautious tone regarding future policy changes. Newnaha also expects the Fed’s “dot plot” to show only one rate cut in 2026, with two cuts viewed as a dovish surprise.
Traders are currently pricing in 77 basis points of easing by the end of next year, according to LSEG data. While a rate cut this week is widely expected, some analysts believe the Fed’s policy committee could be deeply divided.
The meeting also comes amid rising speculation about who will replace Powell when his term ends in May next year. Kevin Hassett, White House Economic Adviser and a leading contender for the job, said in an interview that the Fed should continue lowering rates.
Xiao Cui, senior U.S. economist at Pictet Wealth Management, expects solid economic growth, above-target inflation, and a cooling labor market to widen divisions within the FOMC. She warned that Fed rate cuts could be pushed into the second half of 2026.
Asian chip stocks were mixed after President Donald Trump said the U.S. would allow Nvidia’s H200 processors—its second-best AI chips—to be exported to China, with a 25% fee applied to those sales. China’s CSI Semiconductor Index fell 0.5%, while the broader CSI300 dipped 0.47%.
In currency markets, the dollar was stable. The euro last traded at $1.1649, while the British pound rose 0.11% to $1.3336. The Australian dollar gained 0.33% to $0.6646, holding near its highest level since mid-September after RBA Governor Michele Bullock highlighted inflation risks that could justify higher rates.
The Japanese yen was little changed at 155.91 per dollar. It had weakened immediately after a strong 7.5-magnitude earthquake struck northeastern Japan. Authorities lifted tsunami warnings on Tuesday after the quake injured at least 30 people and forced around 90,000 residents to evacuate.
In commodities, oil prices extended losses following a 2% decline in the previous session. Traders monitored ongoing peace talks aimed at ending Russia’s war in Ukraine. Brent crude slipped 0.3% to $62.32 a barrel, while U.S. West Texas Intermediate crude fell 0.41% to $58.64.
