Tech rally boosts Asian stocks, dollar firms on rate-hike wagers

Asian markets surged higher on Tuesday as technology stocks drove the rally, buoyed by lower oil prices and hopes for US-Iran talks. The dollar also strengthened on bets that more interest rate hikes may be necessary to combat inflation. Attention is now turning to a high-stakes meeting between US President Donald Trump and Chinese President Xi Jinping, with investors watching for signs of improved relations between the two global powers.

Xi Jinping arrived in Washington, D.C. on Wednesday for his first visit to the United States in over a decade, amid optimism that a truce deal between the two nations could be extended, potentially leading to cooperation on artificial intelligence.

The drop in oil prices, which steadied at US$100.22 per barrel after falling over 3% the previous day, played a significant role in the market rally. Nick Twidale, chief market strategist at ATFX Global, noted that oil has been the main driver of the recent gains, and investors have been returning to artificial intelligence (AI) stocks as has been the trend this year.

MSCI's broadest index of Asia-Pacific shares outside Japan rose more than 1% in early trading, with tech-heavy South Korean stocks jumping nearly 2% and Taiwan shares gaining 1.3%. However, Japanese markets were closed for a holiday.

The excitement surrounding Meta's Muse AI assistant has contributed to the positive sentiment, with investors seeing the potential for millions of people to eventually use persistent AI agents. Chris Weston, head of research at Pepperstone, emphasized that the combination of Meta Muse injecting new confidence in the CPU demand profile, lower crude prices, falling Treasury yields, and optimism towards the US-China summit has supported the market move.

Investors are also watching for further interest rate hikes from major central banks, which could continue to reinforce the dollar's strength and put pressure on the yen. The yen was trading at 157.39 per US dollar, near a three-week low, after the Bank of Japan raised rates to a 31-year high last week. However, two dissenting votes and a lack of explicit hawkish guidance from the central bank disappointed investors, leaving the yen vulnerable and potentially requiring intervention by authorities to prevent further weakness.

The Federal Reserve, on the other hand, raised rates last week and signaled that the fight against inflation is not over, keeping the door open to additional tightening. The dollar index was at 100.4, just shy of a seven-week high, with traders pricing in a 56% chance of a rate hike in October, up from 43.5% a week earlier.