Asia FX firms, dollar sinks on bets of no more Fed rate hikes

Investing.com-- Most Asian currencies strengthened on Thursday, while the dollar fell sharply after mixed signals from the Federal Reserve ramped up bets that the central bank will not raise interest rates further. 

The Australian dollar was among the best performers for the day, surging 0.7% and blazing past weaker-than-expected trade data. 

Markets were growing increasingly confident that the Reserve Bank of Australia will raise interest rates when it meets next week, bringing them closer to U.S. levels and making the Aussie appear more attractive. 

The Japanese yen jumped 0.5%, recovering sharply from a one-year low as government officials continued to threaten intervention in currency markets. But the yen was still above the 150 level to the dollar, having logged steep losses this week following dovish signals from the Bank of Japan. 

Dollar slides as Powell strikes less hawkish tone

The dollar index and dollar index futures fell 0.5% each in Asian trade, extending overnight losses as traders ramped up bets that the Fed was done raising interest rates. 

While the Fed left rates unchanged, as expected, Chair Jerome Powell struck a less hawkish tone than markets were expecting, by acknowledging that monetary conditions had tightened substantially in recent months.

Powell still left the door open to one more hike. But markets took his comments as a sign that the Fed was done with its run of rate hikes, and was likely to cut rates by mid-2024.

But even if the Fed doesn’t hike rates further, they are expected to remain above the 5% level until at least end-2024. This presents limited upside for Asian currencies, most of which are nursing steep losses this year due to pressure from rising U.S. rates.

Focus was now on key nonfarm payrolls data, due Friday. Any signs of a cooling labor market are likely to give the Fed more impetus to keep rates on hold. 

Broader Asian currencies advanced on Thursday. The South Korean won rose 0.5% as data showed that Korean inflation grew more than expected in October.

The Singapore dollar added 0.2% before key retail sales data due on Friday, while the Malaysian ringgit added 0.4% before an interest rate decision later in the day. 

Chinese yuan lags as economic jitters persist 

The Chinese yuan was the worst performer among its Asian peers on Thursday, moving little as a string of weak economic readings from the country kept investors at bay.

Purchasing managers index data released earlier this week showed an unexpected decline in Chinese manufacturing activity, raising doubts over an economic recovery in the world’s second-largest economy.

A reading on the services sector is due on Friday, and is expected to provide more cues on the Chinese economy.