Regional currencies logged sharp gains in December after the Fed said it was done raising interest rates, with recent softer-than-expected inflation data suggesting that the bank could trim rates by as soon as March 2024.
But December’s gains only served to trim steep losses in Asian currencies so far this year, as high U.S. interest rates and a largely resilient dollar spurred steady outflows from risk-heavy, high-yielding currencies through the year.
Most Asian units were set for a muted end to 2023, although their outlook appeared somewhat brighter as the Fed flagged plans for interest rate cuts in the coming year. But while markets were optimistic over early cuts, the bank provided little cues on the timing of the planned cuts.
Dovish signals from regional central banks also weighed on some Asian currencies. The Japanese yen fell 0.1% after the summary of opinions of the Bank of Japan’s December meeting showed most policymakers supported keeping monetary policy ultra-dovish in the near-term.
While the central bank has flagged plans to eventually begin tightening policy in 2024, it provided scant cues on the timing of such a move
A dovish BOJ made the yen the worst-performing Asian currency in 2023, with the unit set for an over 8% loss against the dollar this year.
Broader Asian units were also set for an underwhelming performance in 2023, as most regional central banks paused their rate hike cycles this year amid some cooling in inflation. The Australian dollar rose 0.2% on Wednesday and was set to rise 0.2% in 2023. Focus was also on a Reserve Bank of Australia meeting next week, with the bank widely expected to keep rates on hold.
The Indian rupee was set to lose 0.6% in 2023 after sinking to record lows earlier in the year, while the South Korean won was down nearly 3% for the year.
The Chinese yuan was also among the worst performers for 2023, and was set for a 3.6% loss this year amid worsening sentiment towards the country. A post-COVID economic rebound largely failed to materialize this year.
Focus was now on purchasing managers index data for December, due next week, after a series of weak prints over the past three months.
The dollar index and dollar index futures moved little in Asian trade on Wednesday, and remained pinned at five-month lows.
The currency was set to lose nearly 2% in 2023, with a bulk of its losses coming in December after the Fed signaled it was done raising interest rates and will look at cuts in 2024.
The signals saw traders pivoting out of the dollar and into more risk-driven assets.
Markets now expect the Fed to cut rates between three to five times in 2024, although the bank has given few signals on the breadth of the planned rate cuts.
Fed officials also recently warned that bets on early rate cuts were unfounded, especially as inflation remained sticky.
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