(Bloomberg) -- An extended rally of the dollar has emerged as the central bet after Federal Reserve’s latest policy tightening and hawkish outlook, even as the US currency’s strength looks stretched on some technical indicators, market participants say. 

Beyond the greenback, the focus is on the potential resilience in Asian equities and companies with quality cash flows. Chinese stocks may also be in favor as tamed local inflation offers room for authorities to step up monetary easing and fiscal stimulus to prop up a slowing economy. 

Here is a selection of key comments from analysts and investors: 

Dollar Strength 

TD Securities (strategists including Oscar Munoz and Mazen Issa):

  • The Fed’s “decision does not change our view that the dollar is the only game in town”
  • “We suspect that USD/JPY will remain contained until we get through the BOJ meeting”
  • “There is still uncertainty over the terminal rate. So while we would not be as ardent supporters of USD/JPY topside from current levels, it is likely still premature to look for a sustained reversal lower until the BOJ abdicates yield-curve control at the very least”

Australia & New Zealand Banking Group (David Croy, strategist in Wellington)

  • “After an initial bout of volatility in the first couple hours after the Fed hike, the market has clearly sided with the USD, which offers better carry and safe-haven appeal as downside US and global growth fears percolate”
  • The US dollar has moved up in line with Fed policy expectations over the past year or so. That’s unlikely to change with the Fed now very much on the front foot
  • “Our forecasts have the kiwi going higher, but that’s really just because we see fair value being a bit higher, in the low 0.60s. But the market isn’t focused on valuations right now, and it’s certainly hard to stand in the way of the USD juggernaut at the moment”

Societe Generale (Kit Juckes, chief FX strategist)

  • “Aggressive Fed tightening has pushed the dollar into the final stage of a roaring rally that may come to a dramatic and volatile end”
  • “Accelerating the pace of tightening means we are entering the last stage of the dollar rally, but that doesn’t rule out the risk that this stage is volatile, and dramatic”
  • “The path to a weaker dollar -- so much more attractive when it comes via a soft landing and global economic recovery, remains tortuous”

Asia Slightly Better Placed

Global CIO Office (Gary Dugan, chief executive officer)

  • Asian equity markets may perform better than their global peers in coming months as higher Fed rates weigh most heavily on US equities and funds looking to raise cash will prefer to do so in other markets
  • “Asian equity market remain far better value, many economies have less imbalances than either Europe or the United States”
  • “We expect that Asian markets can outperform global benchmarks in coming months barring a further very steep rise in the dollar”
  • Fed’s outlook is unlikely to instill any panic among the region’s policy makers right now

BNP Paribas Asset Management (Daniel Morris, senior investment strategist)

  • Given the risk to US growth from the substantial increase in interest rates we have already seen and will continue to see, we favor Chinese equities
  • Chinese market also faces challenges from lockdowns, weakening real estate sector, but because inflation is low, both the government and the central bank are able to provide much more fiscal and monetary policy stimulus than the US
  • Broad implications from Fed’s sustained hawkishness are continued strength in the dollar and high Treasury yields, which generally pose challenges for emerging markets

SPI Asset Management (Stephen Innes, managing partner)

  • Asian markets are set to remain under pressure as money continues to move out of the region, which is under-appreciating the Fed’s tightening and the recession that may follow
  • “Investors had under-appreciated the extent of financial market tightening that has already taken place –- never mind what’s coming down the pipe”
  • Recent developments paint a worrying picture for regional exports and earnings
  • Local equities and FX will now “have to price out a more prolonged period of the restrictive policy and dump the notion that the Fed will quickly loosen and growth will resume”

Focus on Quality

Bloomberg Intelligence (Gina Martin Adams, chief equity strategist)

  • Investors should prefer stocks tied to large near-future cash flows and payouts, small market cap and energy as inflation is still very hot, growth is slowing and Fed is raising interest rates extremely rapidly
  • “Low duration equities over high duration equities”; small caps as they have priced a significantly greater degree of downside; and energy stocks as “best inflation hedges” look better placed for portfolio construction
  • “Stay as far clear as you possibly can and continue to shed exposure to the mega cap stocks, which is the area that’s most vulnerable in the equity markets”

Samsung Asset Management (Alan Richardson, portfolio manager)

  • “Portfolios allocation will be more sensitive to valuations paid for stocks and caution to profitless growth concepts”
  • “Allocations will also veer to stocks with earnings quality and non-cyclicality because the risk of recession has increased as a result of more aggressive monetary tightening”

(Updates to add comments from BNP Paribas, Samsung Asset Management and Bloomberg Intelligence.)

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