On Wednesday, most Asian currencies held steady following recent gains, while the US dollar remained close to four-month lows. Traders continued to adhere to the belief that the Federal Reserve would initiate interest rate cuts in early 2024.
Despite warnings from Fed officials cautioning against premature expectations of rate cuts, the sustained decline in the dollar and Treasury yields indicated a growing conviction that rates might start decreasing as early as March 2024.
This sentiment bolstered risk-driven assets, leading to modest gains in rate-sensitive Asian currencies such as the South Korean won and the Australian dollar, both approaching five-month highs with increases of 0.1% to 0.2% on Wednesday.
Asian currencies broadly edged up, building on robust gains from the past week, following signals from the Fed that it had concluded its interest rate hikes and was considering rate cuts in 2024.
Goldman Sachs predicts five rate cuts in 2024, with a bias toward the first half of the year. Market expectations, reflected in Fed Fund futures prices, indicate a more than 67% probability of a 25 basis point cut in March 2024, with additional cuts anticipated in April and May.
The dollar index and dollar index futures stabilized in Asian trading, hovering near their lowest levels since early August. Lower US rates diminish the dollar’s attractiveness, prompting investors to seek higher-yielding, riskier assets.
Despite the optimism, Fed officials cautioned about potential risks to this trade, particularly if inflation remains elevated, necessitating a prolonged stance of higher rates from the Fed.
Dovish moves from some Asian central banks weighed on regional units, with the Chinese yuan slipping 0.1% to 7.1346 against the dollar after the People’s Bank of China maintained its loan prime rate at record lows, underscoring limited policy flexibility.
The Japanese yen was flat after a recent sharp decline from four-month highs. The Bank of Japan, in its last meeting for the year, maintained its ultra-dovish stance, signaling no immediate intention to tighten policy in 2024. Weak import and export data also contributed to yen weakness.
The Indian rupee remained flat near record lows, while the Singapore dollar posted a slight increase.