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Asia FX falls, dollar near 7-week high as Fed says no hurry to cut rates

Published 01/31/2024, 11:43 PM
© Reuters.
- Most Asian currencies retreated on Thursday, while the dollar hovered near a seven-week high after the Federal Reserve kept interest rates steady and shot down expectations for a March rate cut.

Regional currencies were pressured chiefly by strength in the dollar, which shot up in overnight trade after the Fed’s comments. The dollar index and dollar index futures rose 0.2% each on Thursday, and were close to their highest levels since mid-December. 

The Chinese yuan was among the worst performers on Thursday, down 0.2% as data showed little improvement in a sluggish economic recovery. A private survey showed that China’s manufacturing sector grew as expected in January, but its pace of growth now appeared to be slowing. 

Separate data showed the country's home sales plummeted in January, pointing to more pressure on a worsening property crisis.

The Australian dollar fell 0.1% following weaker-than-expected building approval data for December.

The South Korean won rose 0.2%, boosted chiefly by data showing exports grew more than expected in January. This also saw the country’s trade balance shrink less than expected. 

Japanese yen an outlier as hawkish BOJ bets grow 

The Japanese yen was a key outlier among its Asian peers, rising for a second straight session after a summary of opinions from the Bank of Japan’s January meeting showed policymakers actively discussing a pivot away from its ultra-dovish stance.

While the BOJ gave no direct indication on when it plans to begin tightening policy during the meeting, the summary indicated that a growing number of policymakers were now seeing more conditions being met for a pivot away from negative interest rates. 

Higher Japanese interest rates will be a key point of support for the yen, which was battered by a widening gulf between local and U.S. rates over the past two years. 

Fed downplays early rate-cut bets, markets now see May cuts 

Fed Chair Jerome Powell said that recent stickiness in inflation will keep the central bank from carrying out any monetary loosening in the near-term. This saw traders largely scale back bets that the Fed will begin cutting interest rates by as soon as March 2024.

But Powell still noted much progress in the central bank’s fight against inflation, while also flagging continued resilience in the U.S. economy. His comments saw traders begin pricing in the possibility that the central bank will begin cutting rates from May 2024.

Traders were also pricing in the notion that a delay in the Fed’s interest rates will see the bank carry out monetary loosening more aggressively later in 2024, pointing to deeper interest rate cuts. 

Goldman Sachs analysts said they still expect five rate cuts in 2024, beginning from May. The CME Fedwatch tool shows traders pricing in an over 60% chance for a 25 basis point cut in May. 

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