BENGALURU Investors exited risk-prone emerging Asian assets on Thursday, after a hotter-than-expected US inflation reading overnight poured cold water on expectations of a June interest rate cut from the Federal Reserve (Fed).

US consumer prices rose more than expected in March, leading investors to think that the Fed would deliver an interest rate cut in September than in June.

Meeting minutes from the Fed did not help risk sentiment either, showing that officials were wary about progress on inflation even before the March consumer price index (CPI) data.

That sent the dollar index and the benchmark 10-year yields surging. The dollar index jumped about 1% overnight to 105.30, its highest in nearly five months. It was trading at 105.29 as of 0655 GMT.

Traders are now pricing in a less than 20% chance for a rate cut in June, sharply down from more than 60% last week, the CME FedWatch tool showed.

Among Asian currencies, the South Korean won weakened 0.7% to hit its lowest close since November 2022, while the Taiwan dollar ended down 0.6%, lingering near its mid-November 2023 lows. The Thai baht and Singapore dollar were trading flat.

Central banks in Singapore and South Korea are expected to keep their respective policy stances unchanged on Friday. Both the Thailand and Philippine central banks held their rates steady this week.

"The 'risk off' function, with unwinding pivot bets accentuating the USD and UST yield spike, is too much of a headwind for EM Asia markets to shrug off," Vishnu Varathan, chief economist for Asia ex-Japan at Mizuho Bank, said in a research note.

"That adage 'don't fight the Fed' will probably be conveyed as 'fret the Fed' ... with the drag on EM Asia currencies, equities, and higher bond yields to show for it."

The Philippines peso was a notable outlier, rising about 0.2% after the archipelago-country posted a narrower trade deficit for February.

"The surprise jump in exports would mean less pressure on the currency (peso), which will be key in the near term given the recent pullback by Asian currencies," ING analysts said.

Asian bonds tracked a sell-off in their US peers, with the 10-year Singapore bond yield jumping to its highest since late October and the 10-year South Korean bond yield ending at a four-month peak.

Stocks in Manila, Singapore, Bangkok and Taipei fell between 0.1% and 1%.

Seoul shares drifted in a narrow range after falling earlier. The country's liberal opposition parties scored a landslide win in the legislative elections.

Separately, Chinese shares edged 0.2% higher after shrugging off weak consumer data.

Markets in India, Indonesia and Malaysia were closed due to public holidays.

  - Reuters