Most Asian currencies experienced significant gains on Thursday, while the dollar retreated from its two-week highs following comments from the Federal Reserve that kept expectations of interest rate cuts alive.
The Fed’s decision to maintain interest rates steady on Wednesday, coupled with its projection for a 75 basis point reduction in rates this year, fueled appetite for high-yielding, risk-driven assets in the region.
USDJPY Retreats on Fed Signals and BOJ Rate Hike
The Japanese yen notably strengthened, leading to a 0.5% decline in the USDJPY pair from its four-month high to 150.53. Expectations of U.S. interest rate cuts, along with a more hawkish stance from the Bank of Japan (BOJ), contributed to the yen’s appreciation. The BOJ’s recent rate hike, the first in 17 years, was supported by signs of resilience in the Japanese economy, as indicated by March’s purchasing managers index data.
AUDUSD Surges on Strong Labor Data
The Australian dollar outperformed other currencies in the region, with the AUDUSD pair surging by 0.6%. This rally was driven by robust labor market data, including stronger-than-expected employment figures and a decline in unemployment to a six-month low. The positive labor market outlook provided the Reserve Bank of Australia with more flexibility to maintain higher interest rates, despite less hawkish signaling from the RBA in a recent meeting.
Dollar Weakens as Fed Rate Cut Expectations Grow
The dollar index and dollar index futures witnessed significant declines in Asian trade, reflecting increasing expectations of Fed rate cuts as early as June. Fed officials’ statements suggesting potential rate cuts of at least 75 basis points this year, coupled with Fed Chair Jerome Powell’s confidence in inflation remaining on target, fueled market sentiment towards rate cuts. Traders are now pricing in over a 70% chance of a 25 basis point rate cut in June, according to the CME Fedwatch tool. This sentiment led to a strengthening of broader Asian currencies, with notable declines in the South Korean won’s USDKRW pair and the Singapore dollar’s USDSGD pair.
Conclusion
Overall, Asian currencies surged while the dollar weakened amid growing anticipation of Fed rate cuts. Positive economic indicators, coupled with central bank signals and market expectations, contributed to the dynamic shifts in currency markets across the region.