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Asia FX weakens, dollar strong as traders price out early rate cuts

Published 02/04/2024, 11:59 PM
Updated 02/04/2024, 11:59 PM
© Reuters.

Investing.com-- Most Asian currencies weakened on Monday, while the dollar steadied at a near two-month high as strong labor market data and hawkish signals from the Federal Reserve saw traders reconsider bets on early interest rate cuts.

Regional currencies were reeling from steep losses on Friday after U.S. nonfarm payrolls data read much higher than expected for January, pointing to continued resilience in the labor market. 

Fed Chair Jerome Powell said in a late-Sunday interview on CBS 60 Minutes that resilience in the U.S. economy gave the Fed more headroom to keep monetary policy steady for the time being. He also flagged a largely data-driven approach to any potential rate cuts. 

Powell’s comments came just days after the Fed offered similar signals during its first meeting of 2024, and spurred extended gains in the dollar and Treasury yields.

The dollar index and dollar index futures both rose 0.1% in Asian trade, and were at their highest levels since early-December. 

The CME Fedwatch tool showed investors pricing in an even lower chance of a rate cut in March, while traders also slashed expectations for a cut in May. Several analysts said they now only expect the central bank to begin trimming rates by June.

This scenario bodes poorly for Asian units, given that high U.S. rates diminish the appeal of high-yield, risk driven assets. 

Persistent concerns over China also dented regional currencies, after a private survey showed Chinese service sector activity grew less than expected in January. The yuan fell 0.1%, although further losses in the currency were stemmed by a stronger midpoint fix and signs of currency market intervention by the People’s Bank.

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Chinese inflation data due this Thursday is expected to offer few positive signals on the economy, before the week-long Lunar New Year holiday. 

The Australian dollar fell 0.1%, as data showed a smaller-than-expected fall in the country’s trade surplus through December. But focus in Australia was largely on a Reserve Bank meeting this Tuesday.

While the central bank is expected to keep rates steady amid falling inflation, traders will be looking out for any cues on the RBA’s plans to begin cutting interest rates this year. 

The Japanese yen was flat on Monday, supported by purchasing managers index data showing the services sector grew more than expected in January.

But the yen traded just above a two-month low, having clocked steep losses on Friday as traders looked to higher-for-longer U.S. rates.

The South Korean won was among the few outliers for the day, rising 0.3%, while the Indian rupee tread water before a Reserve Bank of India meeting due later this week. 

The Singapore dollar fell 0.2% following weak retail sales data for December.

 

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