Asia FX dips, dollar steady as sticky inflation clouds Fed outlook

Investing.com-- Most Asian currencies retreated on Wednesday, while the dollar steadied as sticky U.S. inflation data cast some doubts over what the Federal Reserve will signal at the conclusion of a meeting later in the day.

Regional currencies were nursing some losses in recent sessions, as the dollar rebounded on signs of resilience in the U.S. labor market. Data for November also showed a mild uptick in inflation, indicating that the U.S. economy may not be cooling as rapidly as the Fed was anticipating.

This notion weighed on most Asian currencies, as did persistent concerns over an economic slowdown in China.

The Chinese yuan lost 0.1%, extending losses after a dismal reading on inflation over the weekend. China slid further into disinflation territory in November, indicating that economic conditions in the country remained weak.

The Japanese yen shed 0.1%, having reversed much of a recent rally after media reports showed the Bank of Japan was in no hurry to tighten its ultra-dovish policy.

A Bank of Japan meeting is also due next week, although the central bank is expected to signal no changes to negative interest rates.

The Australian dollar shed 0.1%, while the Singapore dollar lost 0.2%.

Caution before the Fed saw risk-heavy Asian currencies log steeper losses. The South Korean won fell 0.4%, while the Malaysian ringgit led losses across Southeast Asia with a 0.5% fall.

The Indian rupee was flat, having taken few cues from a strong inflation reading for November. But the reading was largely in line with a Reserve Bank of India warning that inflation will increase in the coming months, due to higher food prices.

Fed set to hold interest rates, but outlook uncertain

The dollar index and dollar index futures rose slightly in Asian trade.

Markets remained convinced that the Fed will leave interest rates unchanged later on Wednesday.

But strong labor market and sticky inflation readings brewed some uncertainty over what the central bank’s outlook is for 2024. Nonfarm payrolls rose more than expected in November, while consumer inflation inched up and remained well above the Fed’s 2% annual target.

Traders were seen scaling back bets on a March interest rate cut, amid growing concerns that Fed Chair Jerome Powell could reiterate the bank’s higher-for-longer rhetoric.

Any hawkish signals from the Fed are likely to spur a sharp unwinding in risk-driven assets, which had rallied sharply over the past month amid optimism over a Fed pivot.

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