Asian Currencies Hold Steady as Dollar Stays at 5-Month Low
Most Asian currencies remained stable on Tuesday as the dollar lingered near five-month lows. This comes as soft U.S. inflation data has fueled increasing bets on potential interest rate cuts from the Federal Reserve in 2024.
Trading volumes were subdued due to year-end holidays in major markets, and the economic release schedule for the week indicated limited new cues for the markets.
Despite the light economic calendar, the weaker dollar and optimism over potential rate cuts in 2024 have put most Asian currencies on track for strong gains in December. These recent gains have also helped Asian currencies regain some of the ground lost against the dollar over the past year.
Japanese Yen Sees Modest Strength Amid BOJ Talks Pivot
The Japanese yen rose 0.1% on Tuesday after Bank of Japan Governor Kazuo Ueda signaled progress towards achieving the central bank’s 2% annual inflation target.
Ueda mentioned that progress towards the inflation target raises the possibility of an early policy pivot by the BOJ. The central bank has maintained negative interest rates for nearly eight years and is expected to pivot away from its ultra-dovish stance in 2024, although the timing of such a move remains uncertain. A more hawkish BOJ outlook bodes well for the yen, which had been affected by rising U.S. interest rates throughout 2023.
Last week’s data revealed a sharp decline in inflation in November, bringing it closer to the BOJ’s annual target. Broader Asian currencies also advanced, tracking a softer-than-expected reading on the U.S. – the Fed’s preferred inflation gauge.
The Singapore dollar rose 0.3% in holiday trade, while the Thai baht and the Indonesian rupiah added 0.2% each. The Indian rupee rose 0.5%, while the Philippine peso lagged its peers, trading sideways near record lows.
The Chinese yuan also lagged its peers, falling 0.1% amid persistent concerns over an economic slowdown in China. This notion had been a key weight on the yuan throughout 2023, limiting a recovery in the currency over the past month. Focus is now on data for December, due next week.
Dollar at 5-Month Low as Early Rate Cut Bets Grow
The dollar saw extended losses after the PCE reading, amid growing bets that the Fed could cut interest rates as soon as March 2024. The Australian dollar and the New Zealand dollar fell 0.1% each in Asian trade and were at their weakest since late-July.
Although the PCE reading remained well above the Fed’s 2% annual target, it came on the heels of warnings from several Fed officials that early interest rate cut bets were overly optimistic. Markets are currently pricing in over a 70% chance that the Fed will cut rates by 25 basis points in March. The bank will have much more U.S. economic data to consider in the interim.
