Forex
Asia FX set for weekly losses, dollar strong ahead of payrolls reading
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Investing.com– Most Asian currencies moved in a flat-to-low range on Friday, while the dollar hovered near three-week highs as markets awaited key U.S. labor data for more cues on the Federal Reserve’s plans for interest rate cuts.
Regional currencies were set for steep losses in the first week of 2024, as the dollar rebounded sharply amid growing uncertainty over exactly when the Fed plans to begin trimming interest rates.
Traders were seen scaling back expectations that the Fed could begin cutting rates by as soon as March 2024, while the full scope of the potential cuts also remained unclear.
Asia FX heads for weekly losses as late-2023 recovery stalls
The rate-sensitive was among the worst-hit by this uncertainty, with the currency set to lose nearly 3% this week after a series of steep losses.
The yen was at its weakest level in more than three weeks, as sentiment towards Japan was also dented by a devastating earthquake in the country.
Other Asian currencies were also set for steep weekly losses, as traders largely unwound a rebound in the sector through late-2023.
The fell 0.1% on Friday and was set to lose nearly 1% this week, as sentiment towards China remained largely negative. The yuan was among the worst-performing Asian currencies in 2023, as a Chinese economic rebound failed to materialize.
Still, more weakness in the yuan was held back by a series of stronger daily midpoint fixes by the People’s Bank of China.
The was flat on Friday, and was set to lose 1.5% this week, while the also tread water and was headed for a 1.6% weekly loss.
The hovered near record lows before the release of government estimates for gross domestic product in 2024. A Reuters poll expects the government to forecast growth at over 7%, given that the Indian economy is among the best-performing major global economies.
Dollar near three-week high amid pre-payrolls angst
The and moved little on Friday, but remained close to their highest levels since mid-December. The two were also set to add about 1.1% this week- their best week since July 2023.
The greenback shot up this week as traders sought more conviction that the Fed will begin cutting interest rates early in 2024. The CME Fedwatch tool saw traders lower their expectations for a March 2024 rate cut to 62% from 72% seen a week earlier.
Focus was now squarely on key data for December, due later in the day. While the reading is expected to show more cooling in the labor market, traders remained on edge over any signs of unexpected strength, given that the U.S. labor market ran hot through most of 2023.
A cooling labor sector is among the key considerations for the Fed to begin trimming rates, along with inflation. But while the two factors have seen considerable cooling in recent months, traders were uncertain whether the trend would be enough to spur aggressive rate cuts by the central bank in 2024.
Asia currencies logged a muted performance in 2023, amid pressure from high U.S. interest rates. But this trend may change later in 2024, as the Fed begins trimming rates.
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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