Dec 13, 2023: On Wednesday, most Asian currencies saw a decline, while the dollar stabilized due to persistent U.S. inflation data, creating uncertainties about the Federal Reserve’s forthcoming signals following its scheduled meeting.
The regional currencies had been facing setbacks in recent sessions as the dollar surged, driven by indications of resilience in the U.S. labor market. November’s data also revealed a slight uptick in inflation, challenging the Fed’s earlier assumptions about the pace of the U.S. economy’s cooling.
This realization had a dampening effect on most Asian currencies, compounded by ongoing concerns about a slowdown in China.
The Chinese yuan experienced a 0.1% drop, extending losses triggered by dismal inflation data over the weekend. China’s descent into deeper disinflation territory in November underscored the prevailing weaknesses in the country’s economic conditions.
Similarly, the Japanese yen declined by 0.1%, retracing much of its recent gains following reports suggesting the Bank of Japan’s lack of urgency to tighten its extremely accommodative policy.
While the Bank of Japan convenes next week, expectations lean towards the indication of no alterations to the current negative interest rates.
In the same vein, the Australian dollar decreased by 0.1%, and the Singapore dollar saw a 0.2% decline.
Ahead of the Fed’s meeting, Asian currencies more susceptible to risks experienced steeper declines. The South Korean won dropped by 0.4%, while the Malaysian ringgit led the downturn across Southeast Asia, falling by 0.5%.
Conversely, the Indian rupee remained relatively unchanged, showing little reaction to robust inflation data for November. However, this aligns with the Reserve Bank of India’s cautionary note forecasting an inflation rise in the upcoming months due to elevated food prices.
Fed Likely to Maintain Interest Rates, Outlook Remains Uncertain
During Asian trade, both the dollar index and dollar index futures displayed slight upward movements.
The market sentiment remains convinced that the Fed will maintain the current interest rates by the end of Wednesday’s meeting.
However, the robust labor market and persistent inflation data have introduced uncertainty about the Fed’s outlook for 2024. November’s nonfarm payrolls surpassed expectations, while consumer inflation edged upwards, remaining notably higher than the Fed’s 2% annual target.
Traders have begun reducing their expectations of a March interest rate cut amid growing apprehensions that Fed Chair Jerome Powell might reiterate the bank’s stance favoring prolonged monetary accommodation.
Any indications of a hawkish stance from the Fed are expected to trigger a significant correction in risk-driven assets, which had surged significantly over the past month amid optimism about a potential shift in Fed policy.
