Asia FX Muted, Dollar Steadies Ahead of Fed Meeting

By Ambar Warrick

Investing.com-- Asian currencies moved little on Tuesday, while the U.S. dollar steadied near 20-year highs as focus turned to an upcoming interest rate hike by the Federal Reserve.

Regional currencies barely budged more than 0.2% in either direction, with traders wary of making big bets ahead of the Fed decision. Rising U.S. interest rates are expected to keep weighing on Asian currencies for the remainder of the year.

The dollar index fell 0.2% on Tuesday, while dollar index futures also shed 0.2%. But both indicators remained pinned just below 20-year highs, boosted by expectations that the Fed will raise rates by at least 75 basis points (bps).

Traders are also pricing in the possibility of a bigger, 100 bps raise after hotter-than-expected U.S. inflation data last week. This week’s rate hike will bring U.S. rates closer to peaks last seen before the 2008 financial crisis.

Focus this week will also be on the Fed’s inflation and interest rate forecast for the remainder of the year.

The Fed has already raised rates four times so far this year, a move that has significantly boosted the dollar and dented Asian currencies, as the gap between risky and low-risk debt narrowed. U.S. Treasury yields are currently trending around decade highs.

Currencies such as the Japanese yen and the Chinese yuan have been the worst hit by this trend, as their respective central banks held off from raising interest rates due to sluggish economic growth.

The yuan was flat on Tuesday after the People’s Bank of China held its loan prime rate. Weakness in the yuan, which is trading near two-year lows, means the central bank has to strike a delicate balance between loosening monetary policy and preventing further losses in the currency.

The Japanese yen also moved little, as data on Tuesday showed core consumer inflation hit a near eight-year high in August. The Bank of Japan, which is set to meet later this week, has so far shown no inclination to raise rates from negative levels, even as the yen plummeted to 24-year lows.

Central banks in Indonesia and Philippines are also set to decide on interest rates this week, with both banks likely to raise rates.

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