Feb 7, 2024: Asian currencies maintained stability on Wednesday, recovering slightly after recent declines as the dollar pulled back from its recent three-month peak. However, apprehension persisted among traders due to the likelihood of sustained higher U.S. interest rates.
Over the past three sessions, regional currencies experienced significant losses following robust U.S. economic data releases and hawkish remarks from Federal Reserve officials, which led traders to largely discard expectations of early rate cuts by the central bank.
The dollar, buoyed by this trend, remained near its strongest levels since early November. While both the dollar index and dollar index futures saw a modest decline of about 0.1% in Asian trade, the overall sentiment favored a robust dollar, with markets increasingly ruling out rate cuts in March and May. This scenario is expected to exert continued pressure on Asian currencies in the coming weeks, as higher U.S. rates diminish the attractiveness of riskier, high-yielding assets.
Looking ahead, U.S. inflation data scheduled for release next week will likely provide further insights into the trajectory of interest rates.
Among Asian currencies, the Australian dollar stood out by posting a 0.1% gain, extending its strong performance from the previous session after the Reserve Bank of Australia indicated the possibility of further rate hikes in response to persistent inflationary pressures.
The Japanese yen stabilized after hitting a 1-½ month low earlier this week, with uncertainty lingering over the Bank of Japan’s plans regarding policy tightening.
Meanwhile, the Chinese yuan remained relatively unchanged, continuing to lag behind its regional counterparts amid ongoing concerns about China’s economic recovery. Despite recent measures introduced by Chinese authorities to support local stock markets, they did little to alleviate worries about the country’s sluggish economic growth.
Thursday’s release of Chinese inflation data for January is anticipated to offer little support to the yuan, particularly ahead of the week-long Lunar New Year holiday.
Most other Asian currencies traded within narrow ranges, with the Singapore dollar and South Korean won recovering slightly after experiencing some losses earlier in the week. Additionally, the Indian rupee strengthened ahead of the Reserve Bank of India’s meeting, with a Reuters poll suggesting some potential for further appreciation.