Asia FX skittish as dollar hits 2-yr high on bets of slower rate cuts

Most Asian currencies moved in a flat-to-low range on Friday, pressured by strength in the dollar as traders positioned for a slower pace of interest rate cuts by the Federal Reserve in 2025.

Regional trading volumes remained slim on account of the new year holidays, with Japanese markets remaining closed until next week.

The Chinese yuan was among the worst performers in Asia, hitting its weakest level in nearly 16 months as a Financial Times report said the People’s Bank of China will cut interest rates further in 2025. 

The yuan, along with its regional peers, was also nursing steep losses in 2024, as the dollar benefited from a hawkish Fed and the prospect of protectionist policies under incoming President Donald Trump. Dollar at 2-yr high as rate cut bets ease 

The dollar index and dollar index futures fell 0.1% in Asian trade after racing to a fresh two-year high on Thursday.

The greenback’s latest round of gains came after weekly jobless claims data read stronger than expected, indicating that the labor market remained strong. A strong labor market gives the Fed more headroom in considering future monetary easing.

The central bank signaled during its December meeting that it will cut interest rates at a substantially slower pace in 2025, citing concerns over sticky inflation.

Resilience in the U.S. economy also gives the Fed less impetus to cut rates, although the Atlanta Fed’s gross domestic product estimate was revised lower for the fourth quarter on Thursday.  Chinese yuan weakens as PBOC flags more rate cuts 

The Chinese yuan was among the worst performers in Asia, with the USD/CNY pair rising nearly 0.4% to 7.3275 yuan- its highest level since September 2023.

The FT reported that the PBOC will cut interest rates further in 2025, as the central bank pivots to a more conventional monetary policy structure under a singular benchmark interest rate.

The monetary policy reform comes as a slew of liquidity measures largely failed to stimulate China’s economy over the past two years. This is expected to elicit more monetary easing by the PBOC, which bodes poorly for the yuan. 

The yuan was already nursing losses for the week, as purchasing managers index data released earlier showed slowing growth in China’s manufacturing sector.

Broader Asian currencies moved in a tight range, but were nursing steep losses in recent months as traders positioned for a slower pace of U.S. rate cuts in 2025. 

The Japanese yen’s USD/JPY pair fell 0.1% after hitting an over five-month high in late-December.

The Australian dollar’s AUD/USD pair rose 0.2%, while the South Korean won’s USD/KRW pair fell 0.2% amid repeated assurances of financial stability from the government. 

The Indian rupee’s USD/INR pair steadied at 85.8 rupees after hitting a record high above 86 rupees earlier this week. 

 

Source: Investing.com