Asia FX weak, dollar sturdy as inflation, rate-cut uncertainty persists

Asia FX weak, dollar sturdy as inflation, rate-cut uncertainty persists

Regional currencies were nursing steep losses over the first week of 2024, as markets questioned whether the Federal Reserve will begin trimming interest rates early in 2024.

This notion boosted the dollar, helping the greenback rebound sharply from five-month lows. While the currency saw a spot of profit-taking on Tuesday, it remained well above its December lows.

The Japanese yen was the worst performer among Asian currencies so far in 2024, extending a slump from the prior year as traders grew more convinced that the Bank of Japan will delay a pivot away from its ultra-dovish policies.

Rebuilding and stimulus measures in the wake of a devastating earthquake in central Japan are expected to offset any notion of policy tightening in the BOJ, at least in the near-term.

Such a scenario points to extended pressure on the yen, particularly from a wide gulf between local and international lending rates. Japanese interest rates have remained at ultra-low levels for nearly eight years.

Weak inflation and wage growth data also pointed to less pressure on the BOJ to change its ultra-dovish course.

Broader Asian currencies trended lower, as doubts over early rate cuts by the Fed saw traders remaining largely biased towards the dollar.

The Chinese yuan fell 0.1% ahead of key inflation and trade data later this week, which is expected to show little improvement in Asia’s largest economy. Weakening sentiment towards China had battered the yuan through most of 2023, while the People’s Bank also steadily ran out of headroom to support the currency.

The Indian rupee fell 0.1% after recovering sharply from near record lows, although the uptick was largely attributed to central bank support. Indian consumer price index (CPI) inflation data is due this Friday.

The South Korean won was flat before a Bank of Korea meeting on Thursday, where the bank is expected to keep rates static.

The Australian dollar was among the few outliers for the day, rising 0.3% as data showed CPI inflation eased in November, but still remained well above the Reserve Bank’s 2% to 3% annual target. Underlying inflation also remained sticky amid high food and service prices.

The dollar index and dollar index futures moved little in Asian trade on Wednesday, after seeing some strength in overnight trade.

Focus remained chiefly on upcoming U.S. CPI data, which is expected to show inflation rose slightly in December. But sticky inflation, coupled with recent signs of strength in the labor market, give the Fed more headroom to keep rates higher for longer.

While the central bank is expected to eventually cut interest rates this year, markets have grown increasingly doubtful over whether rate cuts will come by as soon as March 2024.

Fed officials also pushed back against bets for early rate cuts, given that inflation is expected to remain well above the Fed’s 2% annual target in the near-term.

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