Asian Stocks Ease, Dollar Firms as Traders Ponder US Rates

Asian stocks edged lower on Tuesday, while the US dollar firmed, as traders weighed the prospects of higher US interest rates. The cautious sentiment comes amid uncertainty surrounding the Federal Reserve's monetary policy stance and its potential impact on global markets.

The MSCI Asia Pacific Index slipped 0.2% in early trading, led by declines in technology and consumer discretionary stocks. The index had gained 1.6% on Monday, boosted by optimism over a potential US-China trade deal. However, the recent rally appears to be losing momentum as investors await clarity on the Fed's next move.

The US dollar index, which tracks the greenback against a basket of six major currencies, rose 0.1% to 102.67. The dollar has been strengthening recently, supported by expectations of higher US interest rates and a more hawkish Fed. The currency's strength has been weighing on emerging market currencies, with the Indonesian rupiah and Indian rupee among the most affected.

In the bond market, US Treasury yields edged higher, with the 10-year note yield climbing to 2.85%. The yield curve flattened, with the spread between the 2-year and 10-year notes narrowing to its lowest level since 2020. The flattening yield curve is often seen as a sign of investor concern about the economic outlook.

The cautious sentiment in Asian markets comes as traders await the release of US inflation data later this week. The consumer price index (CPI) report will provide valuable insights into the pace of inflation and the Fed's likely response. If the data shows a pickup in inflation, it could reinforce expectations of a more aggressive Fed tightening cycle, potentially weighing on risk assets.

In summary, Asian stocks eased on Tuesday, while the US dollar firmed, as traders pondered the prospects of higher US interest rates. The cautious sentiment comes amid uncertainty surrounding the Fed's monetary policy stance and its potential impact on global markets. Investors are closely watching US inflation data, which could provide clues about the Fed's next move and the outlook for risk assets.