Asian currencies maintained a narrow trading range on Friday as the dollar lingered near four-month lows, with investors anticipating further confirmation of potential interest rate cuts by the Federal Reserve in early 2024.
Regional currencies posted moderate gains throughout the week, while the dollar faced its second consecutive week of losses. Dovish signals from the Federal Reserve led traders to price in between three to five rate cuts by the central bank in 2024. However, uncertainty about the timing of these cuts restrained gains in Asian currencies, particularly as some Fed officials expressed reservations about imminent monetary easing.
The Japanese yen experienced a 0.3% decline after November’s inflation data revealed a cooling Japanese economy, leading to a 16-month low in the core consumer price index. Despite this, inflation remained above the Bank of Japan’s 2% annual target, reducing pressure for an immediate shift from its ultra-dovish policy. The yen was set for a 0.2% weekly loss.
Other Asian currencies traded cautiously before the release of key U.S. inflation data later in the day. The Australian dollar retreated 0.3%, slightly pulling back from its nearly five-month high, but remained on track for a 1.3% weekly gain. The rate-sensitive South Korean won declined by 0.3%, while the Indian rupee hovered near record lows against the dollar.
The Chinese yuan continued to underperform its peers, registering a 0.1% decline on Friday and heading for a 0.4% weekly loss. Concerns over a sluggish economic rebound in China kept investors wary of most Chinese assets.
The dollar index and dollar index futures showed little movement in Asian trade after reaching their lowest levels since early August. A modest downward revision in third-quarter U.S. GDP contributed to growing optimism about potential interest rate cuts in 2024. The focus shifted to the Personal Consumption Expenditures (PCE) price index, the Fed’s preferred inflation gauge, with expectations that persistently high U.S. inflation could influence the central bank to maintain higher rates for an extended period.
Investors closely monitored signs of inflation stickiness, with any indication leading to less dovish measures by the Fed in 2024. This scenario might prompt a pullback in Asian currencies, which have demonstrated strength throughout December. Market expectations currently suggest a 25 basis point rate cut in March 2024, according to Fed Fund futures prices.