Most Asian currencies showed limited movement on Friday but were on track for weekly losses, with the dollar hovering near one-month highs. Increasing doubts about an early interest rate cut by the Federal Reserve fueled the dollar’s strength.
The Japanese yen bore the brunt of concerns about higher-for-longer rates, emerging as the worst performer in Asia for the week. The yen fell 0.1% on Friday and was set to lose 2.3% for the week. Japanese Consumer Price Index (CPI) data revealed inflation at its lowest since June 2022, setting the stage for the Bank of Japan to maintain its ultra-dovish policy in its upcoming meeting.
Worries over China’s economic performance also weighed on broader Asian currencies, especially as the region’s largest economy reported lower-than-expected growth in the fourth quarter of 2023. The yuan was set to lose 0.4% for the week, marking its third consecutive week of declines. However, strong midpoint fixes and interventions by the People’s Bank of China (PBOC) limited the losses.
China’s economic concerns spilled over into other currencies, impacting the Australian dollar, which was down 1.6% for the week, and the South Korean won, heading for a 1.8% weekly decline. The Singapore dollar was set for a 0.8% weekly decline following an unexpected drop in non-oil exports.
The weak start for most Asian currencies in 2024 can be attributed to growing doubts about early interest rate cuts by the Federal Reserve. Signs of resilient U.S. inflation and labor market strength prompted markets to reconsider expectations for rate cuts in 2024.
The dollar index and dollar index futures dipped slightly in Asian trade but remained close to over one-month highs, set to end the week between 0.9% and 1% higher. Strong retail sales data and hawkish-leaning comments from Fed officials increased doubts about an early rate cut. Traders sharply scaled back bets on a March cut, with a 51.9% chance compared to 68.3% seen last week, as recent U.S. economic resilience provided the Fed with room to maintain higher rates until inflation aligns with its 2% annual target. December’s CPI reading showed limited progress in this regard.