Asia FX falls, dollar strong as rate-cut hopes retreat before inflation test

Investing.com-- Most Asian currencies fell on Monday, while the dollar steadied near three-week highs as stronger-than-expected U.S. payrolls data saw traders scale back bets that the Federal Reserve will cut interest rates early. 

The payrolls reading put upcoming U.S. inflation data squarely in focus, as markets sought more cues on when the central bank could potentially begin trimming rates this year. 

Regional currencies clocked steep losses after Friday’s reading, and saw little relief on Monday as traders hunkered down before a string of inflation readings from major Asian economies this week.

Dollar strong as rate-cut bets ease; Inflation awaited 

The dollar index and dollar index futures both firmed slightly in Asian trade on Monday, and remained within sight of a three-week high.

The greenback clocked a strong gain in the first week of 2024, as traders grew uncertain over when the Fed could begin trimming interest rates. This was exacerbated by a stronger-than-expected nonfarm payrolls reading on Friday, with strength in the labor market giving the central bank more headroom to keep rates higher for longer. 

The CME Fedwatch tool shows traders pricing in a nearly 63% chance for a 25 basis point cut in March, down from the 74% chance seen last week.

U.S. consumer price index (CPI) data for December is due this Thursday, and is expected to show some pick-up in inflation- a scenario that bodes poorly for early rate-cut bets. 

Japanese yen nurses steep losses amid BOJ doubts 

Asian trading volumes were somewhat held back by a holiday in Japan on Monday. The yen rose 0.1% after nearly sliding to 145 against the dollar on Friday.

The Japanese currency also logged its worst weekly loss since late-2022 after an earthquake battered central Japan. Rebuilding and stimulus efforts in the wake of the disaster are expected to potentially delay the Bank of Japan’s plans to begin tightening its ultra-loose policy, which is a major weight on the yen.

Focus is now on CPI inflation data from Tokyo for December, which usually acts as a bellwether for nationwide Japanese inflation. 

Asia FX faces inflation test 

Broader Asian currencies retreated slightly on Monday, extending losses from the previous session. Regional markets were also bracing for a string of key inflation readings this week.

The Australian dollar fell slightly, with a monthly CPI indicator for November due this Wednesday. 

The Chinese yuan fell 0.2% despite a stronger-than-expected daily midpoint fix by the People’s Bank, as sentiment towards China remained weak. Inflation data from the country is due this Friday, and is expected to show that China remained in deflation through December. 

Chinese trade data is also due on Friday.

The Indian rupee rose 0.1%, with an inflation reading for December also due on Friday. Central bank intervention in forex markets helped the rupee recover from near record lows last week. 

Among other Asian units, the South Korean won and Singapore dollar fell 0.1% each. 

While regional currencies marked some strength in December on expectations of early interest rate cuts, they still ended 2023 largely unchanged amid pressure from high U.S. interest rates. This trend is expected to continue in early-2024.