Forex
Asia FX muted, dollar at 3-week high as rate-cut uncertainty persists
© Reuters.
Investing.com– Most Asian currencies kept to a flat-to-low range on Thursday, while uncertainty over the Federal Reserve’s plans for interest rate cuts in 2024 saw the dollar rebound to a three-week high.
The provided little clarity on the bank’s plans for rate cuts this year, which further unsettled risk appetite after a weak start to 2024 for financial markets.
Asian currencies remained particularly sensitive to rate-cut anxiety, after having logged a largely dismal performance in 2023 on headwinds from higher interest rates. While regional currencies saw some relief towards the end of the year, the recovery was now on ice.
The moved little as local markets reopened after an extended new year’s holiday. Purchasing managers index (PMI) data showed that Japanese economic activity remained fragile, as the remained in contraction in December.
Sentiment towards Japan was also dented by a devastating earthquake in central Japan, which killed scores of people and disrupted train lines in the region.
The rose 0.2%, although further gains were held back by showing the country’s service sector remained in contraction in December.
Chinese yuan creeps lower, Fitch downgrades national asset managers
The fell 0.1% on Thursday, with further losses in the currency held back by a substantially stronger-than-expected midpoint fix by the People’s Bank.
Sentiment towards China was dealt a fresh blow by Fitch , and placing three of them on watch for more cuts.
The ratings agency cited increased headwinds for the firms from a property market slump, and also raised concerns over the government’s ability to provide financial support to the four.
The four play a key role in maintaining Chinese lending stability by snapping up non-performing assets from the open market, with their downgrade potentially heralding more headwinds for the Chinese economy.
A private survey showing improved growth in China’s did little to shore up sentiment.
The yuan was also among the worst-performing Asian currencies in 2023, as a post-COVID economic rebound fizzled out, while the PBOC cut interest rates further into record-low territory.
Broader Asian currencies were flat on Thursday, after a largely underwhelming performance in 2023. The traded sideways, while the remained in sight of record lows. PMI data showed India’s grew less than expected in December, but still remained well within in expansion territory.
Dollar rebounds to 3-week high, rate-cut uncertainty in play
The and moved little in Asian trade on Thursday, but remained in sight of a three-week high hit in the prior session.
The greenback marked a sharp recovery from five-month lows hit at the end of 2023, as markets second-guessed the timing of the Fed’s planned interest rate cuts.
The minutes of the Fed’s December meeting provided little clarity on the cuts, as policymakers noted progress against inflation, but still highlighted risks to the American economy.
data due on Friday is also expected to factor into the Fed’s outlook on rate cuts, with the still showing market expectations largely geared towards a 25 basis point reduction in March.
High U.S. interest rates saw Asian currencies log an underwhelming performance in 2023. But this trend is likely to change as the Fed begins trimming rates in 2024.
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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