Forex
Asia FX skittish, dollar at 4-mth low before key inflation data
© Reuters.
Investing.com– Most Asian currencies kept to a tight range on Friday, while the dollar hovered around four-month lows as markets awaited more affirmation that the Federal Reserve will cut interest rates earlier in 2024.
Regional units were sitting on some gains this week, while the dollar was set for a second week in red after dovish signals from the Fed saw traders pricing in between three to five rate cuts by the central bank in 2024.
But gains in Asian currencies were held back by uncertainty over the timing of the cuts, especially as several Fed officials pushed back on expectations that monetary easing from the central bank was imminent.
Japanese yen retreats on soft inflation data, BOJ uncertainty persists
The was among the bigger underperformers for the day, falling 0.3% after data showed that inflation eased as expected in November. The currency was also set for a 0.2% weekly loss.
hit a 16-month low as a cooling Japanese economy saw spending decrease, while easing food prices also helped.
But the inflation reading pointed to lesser pressure on the Bank of Japan to consider pivoting away from its ultra-dovish policy, given that high inflation was a key point of contention for the central bank. November’s readings were still well above the BOJ’s 2% annual target.
While the central bank is still expected to reverse its ultra-dovish stance in 2024, the softer inflation reading brings more uncertainty over the timing of the move. The BOJ offered scant cues on a pivot during its meeting earlier this week, which battered the yen.
Broader Asian currencies traded in a flat-to-low range as traders turned cautious before key U.S. inflation data due later in the day.
The fell 0.3%, retreating slightly from a near five-month high hit in the prior session. The currency was also set to add 1.3% this week, as it benefited from improving risk appetite in the wake of a dovish Fed.
The rate-sensitive shed 0.3%, while the remained pinned near record lows of over 83 against the dollar.
The continued to lag its peers, losing 0.1% Friday and heading for a 0.4% weekly loss. Concerns over a sluggish economic rebound in the country kept traders largely wary of investing in most Chinese assets, with stocks bearing the brunt of this aversion.
Dollar at 4-mth low with PCE inflation in focus
The and moved little in Asian trade on Friday after sinking to their weakest levels since early-August.
A slight downward revision in third-quarter saw traders grow more optimistic over interest rate cuts in 2024, although the reading still reflected strong growth in the U.S. economy.
Focus was now squarely on data- the Fed’s preferred inflation gauge- due later on Friday. The reading is expected to show persistent stickiness in U.S. inflation- a scenario that gives the Fed more impetus to keep rates higher for longer.
U.S. inflation is still trending well above the Fed’s 2% annual target, with any more signs of stickiness pointing to less dovish measures by the Fed in 2024. Such a scenario could trigger some pullback in Asian currencies, which had a strong run so far in December.
Markets are still positioning for a 25 basis point rate cut in March 2024, according to .
Investing.com – The US dollar rose in thin holiday-impacted trade Tuesday, retaining recent strength as traders prepared for fewer Federal Reserve rate cuts in 2025.
At 04:25 ET (09:25 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher to 107.905, near the recently hit two-year high.
Dollar remains in demand
The dollar has been in demand since the Federal Reserve outlined a hawkish outlook for its interest rates after its last policy meeting of the year last week, projecting just two 25 bp rate cuts in 2025.
In fact, markets are now pricing in just about 35 basis points of easing for 2025, which has in turn sent US Treasury yields surging, boosting the dollar.
The two-year Treasury yield last stood at 4.34%, while the benchmark 10-year yield steadied near a seven-month high at 4.59%.
“We think this hawkish re-tuning of the Fed’s communication will lay the foundation for sustained dollar strengthening into the new year,” said analysts at ING,in a note.
Trading volumes are likely to thin out as the year-end approaches, with this trading week shortened by the festive period.
Euro near to two-year low
In Europe, fell 0.1% to 1.0396, near a two-year low, with the set to cut interest rates more rapidly than its US rival as the eurozone struggles to record any growth.
The ECB lowered its key rate earlier this month for the fourth time this year, and President Christine Lagarde said earlier this week that the eurozone was getting “very close” to reaching the central bank’s medium-term inflation goal.
“If the incoming data continue to confirm our baseline, the direction of travel is clear and we expect to lower interest rates further,” Lagarde said in a speech in Vilnius.
Inflation in the eurozone was 2.3% last month and the ECB expects it to settle at its 2% target next year.
traded largely flat at 1.2531, with sterling showing signs of weakness after data showed that Britain’s economy failed to grow in the third quarter, and with Bank of England policymakers voting 6-3 to keep interest rates on hold last week, a more dovish split than expected.
Bank of Japan stance in focus
In Asia, fell 0.1% to 157.03, after rising as high as 158 yen in recent sessions, after the signaled that it will take its time to consider more interest rate hikes.
edged 0.1% higher to 7.3021, remaining close to a one-year high as the prospect of more fiscal spending and looser monetary conditions in the coming year weighed on the currency.
Beijing signaled that it will ramp up fiscal spending in 2025 to support slowing economic growth.
Investing.com– Most Asian currencies moved in a tight range on Tuesday, while the dollar extended overnight gains as traders positioned for a slower pace of interest rate cuts in the coming year.
Trading volumes were muted before the Christmas break, while most regional currencies were nursing steep losses against the greenback for the year.
Asian currencies weakened sharply last week after the Federal Reserve effectively halved its outlook for rate cuts in 2025, citing concerns over sticky U.S. inflation.
Dollar near 2-year high on hawkish rate outlook
The and both rose about 0.1% in Asian trade, extending overnight gains and coming back in sight of a two-year high hit last week.
While the greenback did see some weakness after data read lower than expected for November, this was largely offset by traders dialing back expectations for interest rate cuts in 2025.
The Fed signaled only two rate cuts in the coming year, less than prior forecasts of four.
Higher U.S. rates diminish the appeal of risk-driven Asian markets, limiting the amount of capital flowing into the region and pressuring regional markets.
Asia FX pressured by sticky US rate outlook
Most Asian currencies weakened in recent sessions on the prospect of slower rate cuts in the U.S., while uncertainty over local monetary policy and slowing economic growth also weighed.
The Japanese yen’s pair fell 0.1% on Tuesday after rising as high as 158 yen in recent sessions, after the Bank of Japan signaled that it will take its time to consider more interest rate hikes.
The Australian dollar’s pair fell 0.2% after the minutes of the Reserve Bank’s December meeting showed policymakers saw an eventual easing in monetary policy, citing some progress in bringing down inflation. But they still flagged potential upside risks for inflation.
The Chinese yuan’s pair rose 0.1% and remained close to a one-year high, as the prospect of more fiscal spending and looser monetary conditions in the coming year weighed on the currency.
Beijing signaled that it will ramp up fiscal spending in 2025 to support slowing economic growth.
The Singapore dollar’s pair rose 0.1%, while the Indian rupee’s pair rose 0.1% after hitting record highs above 85 rupees.
Investing.com — The dollar has surged past its post-2022 range, buoyed by U.S. economic exceptionalism, a widening interest rate gap, and elevated tariffs, setting the stage for further gains next year.
“Our base case is that the dollar will make some further headway next year as the US continues to outperform, the interest rate gap between the US and other G10 economies widens a little further, and the Trump administration brings in higher US tariffs,” Capital Economics said in a recent note.
The bullish outlook on the greenback comes in the wake of the dollar breaking above its post-2022 trading range, reflecting renewed confidence among investors driven by robust U.S. economic data and policy expectations.
A key risk to the upside call on the dollar is a potential economic rebound in the rest of the world, similar to what occurred in 2016, Capital Economics noted.
Following the 2016 U.S. election, economic activity in the rest of the world rebounded, while Trump’s tax cuts didn’t materialize until the end of 2017, and the Fed took a more dovish path than discounted, resulting in a 10% drop in the DXY on the year, which was its “worst calendar year performance in the past two decades,” it added.
While expectations for a recovery in Europe and Asia seem far off, a positive surprise for global growth “should be ruled out”, Capital Economics said.
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