The Federal Reserve's April minutes upped the prospect of an interest rate hike, sending the dollar higher and most Asia markets lower on Thursday.
"Markets are playing catch up to communications from the U.S. Federal Reserve as they appear to have dramatically under-priced the likelihood of a rate rise over the coming months," noted Angus Nicholson, a market analyst at IG, in a note Thursday.
Japan's benchmark Nikkei 225 index ended flat, up just 0.01 percent, or 1.97 points, at 16,646.66, erasing early gains of more than 1 percent that were likely driven by a rising dollar helping to push down the persistently strong yen. The Japanese currency's strength has dampened earnings for the country's exporters.
The dollar was fetching 110.08 yen at 3:49 p.m. SIN/HK, after the Fed minutes spurred the pair as high as 110.37, its highest levels since late April, compared with levels around 109 on Wednesday.
Other stock markets around the region were mostly lower.
Australia's S&P/ASX 200 ended down 0.61 percent, or 32.86 points, at 5323.30, as a 0.10 percent gain in the heavily weighted financials subindex was offset by sharp drops in the energy and materials subindexes. Commodity prices, which are denominated in dollars, may take a hit from a stronger greenback.
Hong Kong's Hang Seng Index fell 132.08 points, or 0.67 percent, to 19,694.33. Because the Hong Kong dollar is pegged to the greenback, any interest rate hikes in the U.S. are likely to flow through to the protectorate's economy.
On the mainland, the Shanghai Composite ended flat, down 0.18 point at 2807.33 after wavering between positive and negative during the session, while the Shenzhen Composite added 0.56 percent, or 9.80 points, to 1775.88.
South Korea's Kospi ended down 0.51 percent, or 9.95 points, at 1946.78; higher interest rates in the U.S. may spur fund outflows from the country.
The minutes of the Federal Open Market Committee's April meeting, released Wednesday in the U.S., were remarkably direct about the central bank's intentions on interest rates.
"Most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen, and inflation making progress toward the Committee's 2 percent objective, then it likely would be appropriate for the Committee to increase the target range for the federal funds rate in June," the minutes said.
The market didn't need to resort to tea leaves to divine the meaning.
"Despite all the caveats, the message they intended to send was that June was seriously live," Steven Englander, global head of G10 foreign-exchange strategy at Citi, said in a note late Wednesday.
That pushed up the greenback, with , which measures the dollar against a basket of currencies, trading at 95.214 at 3:51 p.m. SIN/HK, touching levels above 95 in the U.S. session for the first time in about a month.
Financial shares were higher as higher interest rates may spur better earnings in the sector. In Australia, ANZ ended up 0.85 percent and in Japan, Mitsubishi UFJ finished up 0.82 percent. In Hong Kong, HSBC tacked on 3.21 percent.
"Banks are a good hedge against higher rates, and some kick off a good yield too," Mark Matthews, head of research for Asia at Julius Baer, said in a note Thursday, citing HSBC's 8 percent yield. "If the Fed really does raise rates, banks could go up a lot."
Commodity stocks around the region lost ground.
Oil prices fell after recently climbing to the highest levels so far this year amid supply concerns after disruptions in Nigeria, Canada, Libya and Venezuela. U.S. crude oil futures fell 1.60 percent to $47.42 a barrel by 3:53 p.m. SIN/HK in Asia trade after settling the U.S. session down 12 cents or 0.25 percent. Brent was down 1.70 percent at $48.10 a barrel.
Among energy plays, Australia's Woodside lost 1.17 percent and South Korea's S-Oil shed 2.80 percent. In Japan, Inpex dropped 5.89 percent after gaining more than 8 percent in the previous session. Hong Kong-listed Cnooc fell 1.42 percent.
Other resources stocks also fell. Heavyweights BHP Billiton and Rio Tinto ended down more than 3 percent each.
Suzuki gained 3.54 percent after dropping 9.37 percent on Wednesday. The company on Wednesday confirmed media reports that it had used the wrong method to test the fuel economy of its cars in Japan.
Some China banking shares lost ground. In a Thursday report, Deutsche Bank said it was increasingly concerned about shadow credit funded or channeled by Chinese banks, saying that the funds were essentially corporate loans that were not captured within the loan category on the banks' books.
Deutsche Bank said it expected regulators to tighten controls soon, likely pressuring the mainland's smaller banks as they were key players in this form of financing.
Among its rating cuts to smaller Chinese banks, Deutsche Bank downgraded China Minsheng Bank's A-shares to sell and its Hong Kong-listed shares to hold. China Minsheng Bank's Hong Kong-listed shares were down 0.14 percent, while its mainland-listed A-shares ended down 1.53 percent.
The Australian dollar touched to its lowest level since early March, touching levels as low as $0.7189, after the country's employment data for April came in worse than expected, with a total of 10,800 net new jobs created, compared with Reuters forecasts for 12,500. Full-time employment also fell by a net 9,300 jobs. The Aussie was fetching as much as $0.7242 before the data; it was fetching $0.7218 at 3:55 p.m. SIN/HK.
"We are becoming more concerned about the quality of the jobs being created," Paul Dales, an economist at Capital Econoimcs, said in a note Thursday, citing that most new jobs are part-time, rather than full time. "The amount of work being done is falling. This supports our view that consumption growth and overall gross domestic product (GDP) growth will probably slow this year even if total employment continues to rise at a healthy clip."
He expects the Reserve Bank of Australia (RBA) to cut rates at its August meeting, after it lowered rates by 25 basis points to a new record low 1.75 percent this month.
Goldman Sachs went one better, saying it now expected the RBA will cut interest rates twice this year, instead of just once, noting that the country has seen a net loss of around 50,000 full-time jobs over four months.
The closed down 3.36 points, or 0.02 percent, at 17,526.62, the S&P 500 closed up 0.42 points, or 0.02 percent, at 2,047.63 and closed up 23.39 points, or 0.50 percent, at 4,739.12.
- Evelyn Cheng contributed to this article.
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- By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1