The dollar saw some weakness in Asian trade, but remained close to an over one-month high, as traders priced in expectations of higher-for-longer U.S. interest rates.
Relative strength in the dollar kept most Asian currencies subdued, as did the prospect of delayed interest rate cuts by the Federal Reserve.
The Chinese yuan was among the few outliers for the day, rising 0.3% from a two-month low amid recent reports that the People’s Bank of China was selling dollars in open markets to support the Chinese currency. The yuan also benefited from a substantially stronger-than-expected midpoint fix by the PBOC.
But the outlook for the yuan remained dismal amid continued pessimism towards the Chinese economy.
The yen hovered near its weakest level since early-December on Tuesday, after the BOJ maintained its ultra-low interest rates and stuck to its ultra-dovish policies.
The central bank also forecast lower inflation in fiscal 2024- a scenario that gives it less impetus to immediately begin tightening its ultra-loose policy. The bank gave scant cues on when it plans to begin tightening policy.
An ultra-dovish BOJ was a key driver of weakness in the yen, as a gulf between local and U.S. interest rates widened further over the past two years. The BOJ is also widely expected to keep rates low for the near-term, heralding little support for the yen.
Broader Asian currencies kept to a muted range. The Australian dollar rose 0.4%, recovering further from a seven-week low, while the South Korean won rose 0.3% after hitting a two-month low last week.
Data showed a mild pick-up in South Korean producer price inflation through December.
The Singapore dollar rose 0.2%, while the Indian rupee steadied above the 83 level, staying close to record lows.
The dollar index and dollar index futures both fell slightly in Asian trade. But the greenback remained close to over one-month highs, amid growing conviction that the Fed will begin trimming interest rates only later in 2024.
The CME Fedwatch tool showed traders now pricing in a greater chance that the central bank will keep rates steady in March, a marked reversal from earlier expectations for a cut. The Fed is also widely expected to keep rates on hold when it meets next week.
But before the Fed, markets have to contend with key U.S. economic readings this week. Fourth-quarter GDP data due on Thursday is expected to show some cooling in growth, while PCE price index data- the Fed’s preferred inflation gauge- is due on Friday, and is likely to reiterate that inflation remained sticky in December.
Higher-for-longer U.S. rates bode poorly for Asian currencies, given that they draw capital away from high-risk, high-yield assets.
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