Asia FX firm, dollar drifts lower with Fed rate cut in sight

Most Asian currencies firmed on Wednesday, while the dollar retreated as markets positioned for a widely expected interest rate cut by the Federal Reserve later in the day. 

Market holidays in Hong Kong and South Korea limited overall volumes, while the Chinese yuan weakened as onshore trade resumed after an extended break. 

The Japanese yen was the best performer in Asia as it rebounded sharply from some overnight losses against the greenback. The yen remained in sight of 2024 peaks hit earlier this week, with a Bank of Japan meeting on tap later this week. Dollar muted, Fed rate cut in focus 

The dollar index and dollar index futures both fell 0.1% each in Asian trade before the conclusion of a two-day Fed meeting later in the day.

The greenback found some strength on Tuesday after stronger-than-expected retail sales data, although it still retained most of its recent losses.

The dollar was pressured chiefly by expectations that the Fed will enact its first interest rate cut in over four years on Wednesday, likely signaling the start of an easing cycle that could see rates fall by at least 100 basis points by the end of 2024. 

But markets were somewhat split over just by how much the Fed will cut rates. Traders were seen pricing in a 64% chance for a 50 basis point cut and a 36% chance for a 25 bps cut, CME Fedwatch showed.

Recent signs of resilience in the U.S. economy- as seen with strong retail sales and inflation data- could give the Fed less impetus to cut rates sharply. But on the other hand, recent signs of weakness in the labor market could push the Fed into enacting deeper cuts.

Still, the prospect of lower rates bodes well for high-yielding, high-risk currencies in Asia, and is likely to spur capital flows into the sector in the coming months.  Japanese yen strong, BOJ in focus 

The Japanese yen was the best performer in Asian trade, as it recovered from losses logged on Tuesday. The USDJPY pair fell 0.7% to 141.36 yen, remaining in sight of an over nine-month low hit earlier this week. 

The yen was buoyed by expectations that the BOJ will strike a hawkish note when it meets on Friday , although analysts are uncertain whether it will hike interest rates again.

Still, a slew of BOJ officials signaled plans to raise rates further in tandem with higher inflation.

Japanese consumer inflation is also due on Friday. 

Broader Asian currencies drifted higher in anticipation of the Fed decision. The Australian dollar’s AUDUSD pair rose 0.1%, while the Singapore dollar’s USDSGD pair fell 0.2%.

The Chinese yuan’s USDCNY pair rose 0.1% as onshore trade resumed after a long weekend, with sentiment towards China pressured by a string of weak economic readings for August. 

The Indian rupee’s USDINR pair hovered around 83.773 rupees, having pulled back further from record highs hit earlier in September. 

Source: Investing.com