HONG KONG - Asian shares retreated on Thursday in line with a global selloff, as markets were spooked by more aggressive noises from U.S. policymakers about the need for tighter monetary policy, which also kept the dollar near a two-year peak.
MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.53% and Japan's Nikkei dropped 1.9%.
"The whole political and policy stance in the U.S. has shifted, and markets are starting to get that," said Redmond Wong, a market strategist at Saxo Markets Hong Kong.
"Attention has really moved towards quantitative tightening after all those Fed speakers and the minutes yesterday, and the objective is to tighten financial conditions and depress aggregate demand. I think the Fed is willing to accept some softness and wants to cool down the labour market, unlike in the past they wanted to protect it."
Minutes of the Fed's March 15-16 meeting released Wednesday, showed deepening concern among policymakers that inflation had broadened through the economy.
U.S. Federal Reserve Governor Lael Brainard said on Tuesday she expects rapid reductions to the central bank's balance sheet.
Wong said that in the long run positive real interest rates would be good for the global economy, but in the medium term there would be a repricing of assets.
Overnight all three major U.S. benchmarks fell with the Nasdaq Composite worst hit, losing 2.22%. In Asia trade S&P 500 futures fell 0.26% and Nasdaq futures fell 0.22%.
Also on investors' minds was the situation in China, which is grappling with a new outbreak of COVID-19.
Shanghai, currently under a city-wide lockdown, reported nearly 20,000 new cases on April 6 - the vast majority asymptomatic - the local government said on Thursday.
Chinese blue chips shed 0.4%, although the Hong Kong benchmark was flat, buoyed by mainland developers after local governments eased restrictions on the property sector.
U.S. Treasuries had sold off sharply in the lead-up to the release of the Fed's minutes before steadying.
The yield on 10-year Treasury notes was little changed in early Asia on Thursday at 2.590% while the 2-year note yield was slightly softer at 2.4511%, leaving this closely watched part of the yield curve slightly steeper after starting the week inverted.
In currency markets the prospect of quantitative tightening in the United States kept the dollar near a two-year high against a basket of currencies.
The dollar index was also supported by commodity currencies' retreat from recent highs due to a dip in oil prices. The euro has also fallen to a one-month low, weighed down by what ING analysts called a "double threat" from the economic impact of new sanctions on Russia and uncertainty about the outcome of the French election.
Oil prices rose on Thursday, however, after falling to a three-week low the day before after large consuming nations said they would release oil from reserves to counter tightening supply.
Brent crude futures was up 1.5% at $102.55 a barrel, while U.S. crude rose 1.3% to $97.35 a barrel.
(Reporting by Alun John; editing by Richard Pullin)