Asia FX muted, dollar steadies as Fed rate decision looms

Asia FX muted, dollar steadies as Fed rate decision looms

Most regional currencies were nursing steep losses in recent sessions, as markets feared a potentially hawkish outlook from the Fed. The dollar was also trading just below six-month highs, having market strong gains in recent weeks.

The Indian rupee was one of the worst-performing regional currencies this week, sinking to a new record low of over 83 against the dollar, before recovering some lost ground.

The rupee was hit hard by a recent spike in oil prices, given India’s large reliance on crude imports. But weakness in the rupee is expected to attract more currency market intervention by the Reserve Bank of India. 

Some weak economic indicators also weighed. The Japanese yen was flat to the dollar as data showed the country’s trade deficit grew substantially more than expected in August, due to weak demand in major export destination China.

But top Japanese currency officials warned against further weakness in the yen, and that they were in close contact with U.S. officials over any more intervention to support the yen.

Their warning also came just a few days before a Bank of Japan meeting, where the central bank is likely to offer more cues on a potential pivot away from negative interest rates. 

The Chinese yuan moved little, as did the offshore yuan, after the People’s Bank of China (PBOC) kept its loan prime rates steady at record lows. The move was widely expected by markets.

The PBOC also set a stronger-than-expected daily midpoint for the yuan on Wednesday, as it struggles to maintain a balance between fostering an economic recovery and preventing further weakness in the yuan. 

Uncertainty over China saw the Australian dollar fall 0.1%, while other China-exposed currencies- including the South Korean won and Singapore dollar– weakened slightly.

The dollar index and dollar index futures moved little in Asian trade on Wednesday, but were trading within sight of a six-month peak hit earlier in September.

Markets were focused squarely on the conclusion of a two-day Fed meeting later in the day, where the central bank is widely expected to keep interest rates on hold.

But a recent uptick in U.S. inflation is expected to elicit a hawkish outlook from the Fed, opening up the possibility of at least one more rate hike this year. Fed Chair Jerome Powell’s address after the conclusion of the meeting will be closely watched for any hawkish signals. 

The central bank is also expected to keep rates at 20-year highs until at least mid-2024, presenting a subdued outlook for Asian markets. 

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