Asia FX muted, dollar steadies with Fed rate cuts in focus

Investing.com-- Most Asian currencies steadied after strong gains on Monday, while the dollar nursed recent losses amid growing conviction that the Federal Reserve was done raising interest rates, and will begin cutting them in early-2024. 

The Japanese yen was one of the biggest beneficiaries of this notion, with the currency having recovered sharply from one-year lows in recent weeks on the prospect of easing pressure from higher U.S. interest rates.

The yen steadied around 146.76 to the dollar, and was close to its strongest level since mid-September. Focus was also on an inflation reading from Japan's capital, due on Tuesday, for more potential cues on the Bank of Japan’s plans for monetary policy.

The Chinese yuan was flat on Monday after recovering sharply against the dollar in recent weeks, with a series of strong midpoint fixes from the People’s Bank offering support. But concerns persisted over China’s economy, especially after a string of weak purchasing managers index readings for November. 

Focus this week is on trade data for the month, although the trend is expected to remain weak amid dwindling exports. 

The South Korean won fell 0.5% after strong gains over the past month, while the Indian rupee was flat, largely ducking a rally in domestic stocks after the ruling BJP party won three key state elections. A Reserve Bank of India rate decision was also on tap this week, with the bank set to keep rates on hold.

The Australian dollar fell 0.3% with the Reserve Bank widely expected to keep interest rates on hold when it meets on Tuesday. The RBA had raised rates by 25 basis points in November, but had struck a largely dovish tone on future rate hikes. 

Dollar steadies near three-month low, Fed rate cut bets grow

The dollar index and dollar index futures rose marginally on Monday, but remained within sights of lows last seen in early-August.

Fed Chair Jerome Powell struck a seemingly less hawkish tone during two addresses on Friday, with markets betting that his comments on maintaining a balance between tight monetary policy and a soft economic landing heralded a definitive end to the Fed’s rate hike cycle. 

While Powell still warned that rates will remain higher for longer, traders ramped up their expectations for a less hawkish Fed in the coming months.

Markets are pricing in an over 90% chance the Fed will keep rates on hold when it meets later in December, and an over 60% chance the bank will begin trimming rates by March 2024.

But these bets are largely contingent on inflation and the labor market, with nonfarm payrolls data due Friday set to offer more cues on the latter.

Still, the prospect of a less hawkish Fed drove stellar gains in Asian currencies through November, while the dollar plummeted.