Asia FX rally cools as Fed minutes help stall dollar losses

Investing.com-- Most Asian currencies moved little on Wednesday, while the dollar stemmed recent declines after the minutes of the Federal Reserve’s late-October meeting reiterated the bank’s outlook on higher-for-longer interest rates.

Regional currencies saw a measure of profit taking after a strong run-up in the past two sessions, as markets priced in bets that the Fed was done raising interest rates.

But Tuesday’s minutes cast some doubt over when the central bank will begin trimming interest rates, given that most Fed officials have also repeatedly signaled higher for longer rates. 

The Chinese yuan- which was one of the best-performing Asian units this week, traded sideways at 7.1386 to the dollar. The currency was boosted by a series of stronger-than-expected midpoint fixes from the People’s Bank of China, as well as reports that Beijing was planning to roll out more stimulus measures, particularly for the beleaguered property sector.

The Japanese yen steadied around 148.20 to the dollar, after strengthening sharply against the greenback over the past week. The prospect of no more Fed rate hikes was a great boost to the yen, which had been battered by a growing rift between U.S. and Japanese interest rates.

But the outlook for the yen remained clouded by uncertainty over a dovish Bank of Japan, which has so far signaled few changes to its ultra-loose stance. 

The Australian dollar fell slightly after racing to over three-month highs in the prior session. Reserve Bank of Australia Governor Michele Bullock warned that inflation in the country remained resilient- a trend that could attract more rate hikes in the coming months.

Among other Asian currencies, the South Korean won rose 0.1%, while the Singapore dollar was flat even as data showed the island state’s economy grew slightly more than initially expected in the third quarter. But growth still remained largely laggard, amid pressure from weakness in China, high inflation and tighter monetary conditions.

The Indian rupee traded sideways, while the Indonesian rupiah led losses across Southeast Asia with a 0.4% drop. 

Dollar arrests recent slide as Fed minutes reiterate rate outlook 

The dollar index and dollar index futures were flat in Asian trade on Wednesday, steadying after sinking to near three-month lows earlier in the week. Growing expectations of no more Fed rate hikes hit the greenback with a wave of selling. 

Tuesday’s Fed minutes offered no new signals, reiterating the bank’s outlook for higher-for-longer interest rates. But the minutes still saw some traders rethink expectations that the Fed will cut rates by as soon as March 2024. 

But expectations for a cut in June remained robust, with CME's Fedwatch tool signaling an around 40% chance for a cut.

Still, the prospect of higher-for-longer U.S. rates limits any major upside in Asian currencies, as the gap between risky and low-risk yields remains narrow.