Asia FX set for weekly losses, dollar strong ahead of payrolls reading

Investing.com-- Most Asian currencies moved in a flat-to-low range on Friday, while the dollar hovered near three-week highs as markets awaited key U.S. labor data for more cues on the Federal Reserve’s plans for interest rate cuts. 

Regional currencies were set for steep losses in the first week of 2024, as the dollar rebounded sharply amid growing uncertainty over exactly when the Fed plans to begin trimming interest rates.

Traders were seen scaling back expectations that the Fed could begin cutting rates by as soon as March 2024, while the full scope of the potential cuts also remained unclear. 

Asia FX heads for weekly losses as late-2023 recovery stalls 

The rate-sensitive Japanese yen was among the worst-hit by this uncertainty, with the currency set to lose nearly 3% this week after a series of steep losses. 

The yen was at its weakest level in more than three weeks, as sentiment towards Japan was also dented by a devastating earthquake in the country. 

Other Asian currencies were also set for steep weekly losses, as traders largely unwound a rebound in the sector through late-2023. 

The Chinese yuan fell 0.1% on Friday and was set to lose nearly 1% this week, as sentiment towards China remained largely negative. The yuan was among the worst-performing Asian currencies in 2023, as a Chinese economic rebound failed to materialize.

Still, more weakness in the yuan was held back by a series of stronger daily midpoint fixes by the People’s Bank of China. 

The South Korean won was flat on Friday, and was set to lose 1.5% this week, while the Australian dollar also tread water and was headed for a 1.6% weekly loss.

 The Indian rupee hovered near record lows before the release of government estimates for gross domestic product in 2024. A Reuters poll expects the government to forecast growth at over 7%, given that the Indian economy is among the best-performing major global economies.

Dollar near three-week high amid pre-payrolls angst 

The dollar index and dollar index futures moved little on Friday, but remained close to their highest levels since mid-December. The two were also set to add about 1.1% this week- their best week since July 2023. 

The greenback shot up this week as traders sought more conviction that the Fed will begin cutting interest rates early in 2024. The CME Fedwatch tool saw traders lower their expectations for a March 2024 rate cut to 62% from 72% seen a week earlier.

Focus was now squarely on key nonfarm payrolls data for December, due later in the day. While the reading is expected to show more cooling in the labor market, traders remained on edge over any signs of unexpected strength, given that the U.S. labor market ran hot through most of 2023. 

A cooling labor sector is among the key considerations for the Fed to begin trimming rates, along with inflation. But while the two factors have seen considerable cooling in recent months, traders were uncertain whether the trend would be enough to spur aggressive rate cuts by the central bank in 2024. 

Asia currencies logged a muted performance in 2023, amid pressure from high U.S. interest rates. But this trend may change later in 2024, as the Fed begins trimming rates.