Dec 26, 2023: Across most Asian currencies, movement remained limited on Tuesday, while the dollar stayed close to its five-month lows following softer U.S. inflation figures that fueled expectations of potential interest rate cuts from the Federal Reserve in 2024.
With significant holidays in multiple major markets, trading volumes stayed subdued, and a light economic release calendar for the week suggested limited new market influences.
Despite this, the anticipation of rate cuts in 2024 and a weakened dollar indicated substantial gains for most Asian currencies in December. These recent gains have also allowed Asian currencies to regain some lost ground against the dollar observed over the past year.
Strength in Yen Amid BOJ Indications
The Japanese yen experienced a 0.1% rise on Tuesday, prompted by Bank of Japan Governor Kazuo Ueda indicating progress toward reaching the central bank’s 2% annual inflation goal.
This advancement toward the inflation objective raised the prospect of a potential shift in policy by the BOJ, Ueda remarked. The BOJ has maintained negative interest rates for almost eight years.
While the bank is expected to veer away from its highly dovish stance in 2024, there have been minimal hints regarding the timing of such a move. However, a more hawkish stance from the BOJ bodes well for the yen, which had faced challenges due to rising U.S. interest rates throughout 2023.
Recent data showed a significant decline in Japanese inflation in November, now positioning closer to the BOJ’s annual target.
Asian Currencies Show Gains
In holiday trading, the Australian dollar climbed by 0.3%, accompanied by the South Korean won and the Singapore dollar, each adding 0.2%.
The Taiwan dollar surged by 0.5%, while the Indian rupee trailed its counterparts, maintaining a sideways trend near its record lows.
Conversely, the Chinese yuan experienced a 0.1% decline amid persistent worries of a slowdown in China. This concern weighed heavily on the yuan in 2023 and restrained its recovery over the past month.
Attention Shifts to Chinese Economic Data
The focus now turns to the upcoming release of Chinese purchasing managers index data for December, anticipated next week.
Dollar on Decline Amid Rate Cut Expectations
The dollar sustained continued losses following the PCE reading, with increased speculation that the Fed could initiate interest rate cuts as early as March 2024.
The dollar index and dollar index futures each slipped by 0.1% in Asian trading, marking their weakest points since late July.
However, despite the PCE figures remaining above the Fed’s 2% annual target, this reading arrived following cautions from several Fed officials, indicating that expectations of early rate cuts might be overly optimistic.
Market assessments, via the CME Group’s Fed Watch tool, suggest a more than 70% probability of a 25-basis-point rate cut by the Fed in March. Yet, the bank will have substantial U.S. economic data to consider in the interim.
