Forex
Asia FX weakens, dollar strong as traders price out early rate cuts
© Reuters.
Investing.com– Most Asian currencies weakened on Monday, while the dollar steadied at a near two-month high as strong labor market data and hawkish signals from the Federal Reserve saw traders reconsider bets on early interest rate cuts.
Regional currencies were reeling from steep losses on Friday after U.S. data read much higher than expected for January, pointing to continued resilience in the labor market.
said in a late-Sunday interview on CBS 60 Minutes that resilience in the U.S. economy gave the Fed more headroom to keep monetary policy steady for the time being. He also flagged a largely data-driven approach to any potential rate cuts.
Powell’s comments came just days after the Fed offered similar signals during its first meeting of 2024, and spurred extended gains in the dollar and Treasury yields.
The and both rose 0.1% in Asian trade, and were at their highest levels since early-December.
The showed investors pricing in an even lower chance of a rate cut in March, while traders also slashed expectations for a cut in May. Several analysts said they now only expect the central bank to begin trimming rates by June.
This scenario bodes poorly for Asian units, given that high U.S. rates diminish the appeal of high-yield, risk driven assets.
Persistent concerns over China also dented regional currencies, after a private survey showed activity grew less than expected in January. The fell 0.1%, although further losses in the currency were stemmed by a stronger midpoint fix and signs of currency market intervention by the People’s Bank.
due this Thursday is expected to offer few positive signals on the economy, before the week-long Lunar New Year holiday.
The fell 0.1%, as data showed a smaller-than-expected fall in the country’s through December. But focus in Australia was largely on a meeting this Tuesday.
While the central bank is amid falling inflation, traders will be looking out for any cues on the RBA’s plans to begin cutting interest rates this year.
The was flat on Monday, supported by data showing the services sector grew more than expected in January.
But the yen traded just above a two-month low, having clocked steep losses on Friday as traders looked to higher-for-longer U.S. rates.
The was among the few outliers for the day, rising 0.3%, while the tread water before a due later this week.
The fell 0.2% following weak data for December.
Investing.com – The US dollar has been on a tear since its late-September 2024 lows, and UBS thinks this near-term strength is likely to persist in the first half of the new year, with room to overshoot.
At 06:15 ET (11:15 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.5% lower, but has gained almost 4% over the course of the last year.
Better incoming US data (nonfarm payrolls and purchasing managers’ index)—and with it, US yields moving higher—have provided broad dollar support, analysts at UBS said, in a note.
Economic news elsewhere has been rather mixed, with growth prospects for Europe staying highly subdued. Accelerating growth in China suggests that there is growth outside the US. But with US tariff risks looming large, stronger activity in China is unlikely to shift investor sentiment and stall the USD rally, in our view.
In the near term, there seem to be limited headwinds holding the USD back, the Swiss bank added.
“US exceptionalism has appeared to reassert itself, with US economic data likely to stay strong in the near term and risks to US inflation moving higher again. The latest growth and inflation dynamics have lifted US growth and inflation expectations, which could allow the Fed to stay on hold in 2025.”
At least in the short run markets are likely to think this way, while other key central banks are likely to cut rates further.
The potential for monetary policy divergence is a powerful driver, which leads to trending FX markets and the potential for overshooting exchange rates.
US tariffs are also looming large, weighing on sentiment. The concern on tariffs is that they will have inflationary consequences. Given inflation scarring is still fresh on investors’ minds, it is dominating market narratives.
“That said, we think that a policy rate of 4-4.5% in the US remains restrictive and is a headwind to economic growth and inflation. This is unlikely to change absent hard evidence that productivity is rising in the US, which may happen given developments in AI and associated investment,” the Swiss bank added.
It appears that the market-unfriendly parts of the new Trump agenda (e.g., tariffs, trade tensions, immigration) are easier to implement and more likely to happen before the market-friendly parts (e.g., tax cuts, deregulation).
“We think a negative impact on US growth is not priced at all in the forex market, which cannot be said for the rest of the world, particularly Europe,” UBS said.
“Hence, we still think that 2025 could be a story of two halves—strength in 1H, and partial or full reversal in 2H. The fact that the USD is trading at multi-decade highs in strongly overvalued territory and that investor positioning (like speculative accounts in the futures market) is elevated underpin this narrative.”
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