The Japanese yen was the worst hit by concerns over higher-for-longer rates, and was also the worst performer in Asia this week. The yen fell 0.1% on Friday and was set to lose 2.3% this week.
Data on Friday showed Japanese consumer price index (CPI) inflation fell to its lowest since June 2022 in December, setting up the Bank of Japan to largely maintain its ultra-dovish policy when it meets next week.
Broader Asian currencies were also dented by growing concerns over China, after the region’s largest economy grew less than expected in the fourth quarter. Growth for 2023 also just edged past a 5% government target.
Losses in the yuan were limited by a series of strong midpoint fixes from the People’s Bank of China. The PBOC was also seen selling dollars on the open market to support the Chinese currency.
The yuan was set to lose 0.4% this week- its third straight week of declines. The currency sank to a near two-month low earlier in the week.
The PBOC is also widely expected to keep its benchmark loan prime rate on hold at record lows this Monday.
Weakness in China spilled over into other currencies. The Australian dollar rose 0.2% on Friday but was down 1.6% for the week after sinking to a one-month low.
The South Korean won was headed for a 1.8% weekly decline, while the Singapore dollar was set for a 0.8% weekly decline following an unexpected drop in the country’s key non-oil exports.
Most Asian currencies were nursing a weak start to 2024, as signs of sticky U.S. inflation and labor market strength spurred growing doubts over early interest rate cuts by the Fed. Regional currencies largely reversed all gains made through December, as markets began pricing in later and potentially smaller U.S. rate cuts in 2024.
The dollar index and dollar index futures fell slightly in Asian trade, but remained close to an over one-month high hit earlier this week. The two were also set to end the week between 0.9% and 1% higher.
Strong retail sales data and a series of hawkish-leaning comments from Fed officials this week spurred increasing doubts that the Fed will begin cutting rates by as soon as March 2024.
Traders were also seen sharply scaling back bets on a March cut, according to the CME Fedwatch tool. Traders were now pricing in a 51.9% chance for a March cut, down sharply from the 68.3% seen last week.
Recent signs of resilience in the U.S. economy gives the Fed enough headroom to keep rates higher for longer. Than bank is also unlikely to budge on interest rates until inflation is within its 2% annual target- with December’s CPI reading showing little progress.
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