Asian currencies experienced minimal movement within a narrow range on Tuesday, while the US dollar lingered close to its five-month lows. Soft US inflation data fueled increasing speculation of potential interest rate cuts by the Federal Reserve in 2024.
With several major markets observing year-end holidays, trading volumes remained subdued. Additionally, a light economic release schedule for the week contributed to a lack of fresh cues in the markets.
Despite the muted conditions, the weaker dollar and optimism surrounding potential rate cuts in 2024 positioned most Asian currencies for significant gains in December. Recent advancements allowed Asian currencies to recoup some losses against the dollar over the past year.
The Japanese yen exhibited a slight increase of 0.1% on Tuesday, influenced by Bank of Japan Governor Kazuo Ueda indicating progress toward achieving the central bank’s 2% annual inflation target. While the Bank of Japan is expected to shift away from its ultra-dovish stance in 2024, the exact timing remains unclear.
Last week’s data revealed a sharp decline in Japanese inflation in November, bringing it closer to the BOJ’s annual target. Broader Asian currencies followed suit, recording gains in response to a softer-than-expected reading on the US PCE price index, the Federal Reserve’s preferred inflation gauge.
In holiday trade, the Australian dollar rose by 0.3%, and the South Korean won and Singapore dollar each added 0.2%. The Taiwan dollar surged by 0.5%, while the Indian rupee traded sideways near record lows. The Chinese yuan, however, lagged behind its peers with a 0.1% decline, reflecting persistent concerns about an economic slowdown in China.
Investors are now turning their attention to Chinese purchasing managers index data for December, scheduled for release next week.
The US dollar faced extended losses after the PCE reading, heightening expectations of potential interest rate cuts by the Fed as early as March 2024. The dollar index and dollar index futures each fell by 0.1% in Asian trade, reaching their weakest levels since late July. Despite these developments, the PCE reading remained above the Fed’s 2% annual target, and warnings from several Fed officials suggested that early rate cut expectations might be overly optimistic. Market indicators, such as the CME Group’s Fed Watch tool, showed a more than 70% chance of a 25 basis points rate cut by the Fed in March, although the central bank will consider additional US economic data in the interim.