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Asia FX rises, dollar at 5-mth low as soft inflation fuels rate cut bets

Published 12/25/2023, 11:16 PM
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Investing.com-- Most Asian currencies moved in a tight range on Tuesday, while the dollar hovered near five-month lows as soft U.S. inflation data spurred increasing bets on interest rate cuts from the Federal Reserve in 2024. 

Trading volumes were muted on account of year-end holidays in several major markets. A light economic release schedule this week also pointed to few novel cues for markets.

Still, a weaker dollar and optimism over rate cuts in 2024 put most Asian currencies on course for strong gains in December. Recent gains also helped Asian currencies recover a measure of losses against the dollar over the past year. 

Japanese yen sees some strength as BOJ talks pivot 

The Japanese yen rose 0.1% on Tuesday, as Bank Of Japan Governor Kazuo Ueda flagged some progress towards achieving the central bank’s 2% annual inflation target.

Progress towards the inflation target raises the possibility of an early policy pivot by the BOJ, Ueda said. The BOJ has kept interest rates at negative levels for nearly eight years. 

The bank is still expected to pivot away from its ultra-dovish stance in 2024, although it has given scant cues on the timing of such a move. Still, a more hawkish BOJ bodes well for the yen, which was battered by rising U.S. interest rates through 2023.

Data released last week showed Japanese inflation fell sharply in November, and was now closer to the BOJ’s annual target. 

Broader Asian currencies also advanced tracking a softer-than-expected reading on the U.S. PCE price index- the Fed’s preferred inflation gauge. 

The Australian dollar rose 0.3% in holiday trade, while the South Korean won and the Singapore dollar added 0.2% each. 

The Taiwan dollar rose 0.5%, while the Indian rupee lagged its peers, trading sideways near record lows. 

The Chinese yuan also lagged its peers, falling 0.1% amid persistent concerns over an economic slowdown in China. This notion was a key weight on the yuan through 2023, and limited a recovery in the currency over the past month. 

Focus is now on Chinese purchasing managers index data for December, due next week.

Dollar at 5-mth low as early rate cut bets grow 

The dollar also saw extended losses after the PCE reading, amid growing bets that the Fed could cut interest rates by as soon as March 2024. 

The dollar index and dollar index futures fell 0.1% each in Asian trade, and were at their weakest since late-July. 

But the PCE reading still remained well above the Fed’s 2% annual target. The reading also came on the heels of warnings from several Fed officials that bets on early interest rate cuts were overly optimistic. 

The CME Group’s Fed Watch tool shows markets pricing in an over 70% chance the Fed will cut rates by 25 basis points in March. But the bank will also have much more U.S. economic data to consider in the interim.

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