Asia FX surges as less hawkish Fed minutes dent dollar

By Ambar Warrick Most Asian currencies rose on Thursday, while the dollar retreated as relatively dovish signals from the Federal Reserve ramped up expectations that U.S. inflation has peaked and that the central bank will lower its pace of future rate hikes.

The South Korean won was among the best performers for the day, rallying 0.8% after the Bank of Korea hiked interest rates by a relatively smaller 25 basis points. The central bank is trying to avoid economic shocks from high interest rates, amid signs of growing stress in the bond market. But the central bank gave no signs that it will stop tightening policy.

The Japanese yen jumped 0.6% and was among the best performers for the day, as local markets caught up with their regional peers after a holiday on Wednesday. The yen was also trading close to a three-month high.

The currency largely shrugged off data that showed business activity shrank in November, heralding more economic headwinds for the Japanese economy.

China’s yuan rose 0.4%, while gains in its offshore counterpart were somewhat muted as investors continued to fret over rising COVID-19 cases in the country. China is grappling with a record-high daily increase in infections, which spurred the reintroduction of movement curbs in several major cities.

But a weakening dollar and expectations of smaller interest rate hikes by the Federal Reserve helped most Asian currencies look past concerns over China. The dollar index fell 0.3%, while dollar index futures sank 0.4%, with both instruments coming close to their weakest level in over three months.

The minutes of the Federal Reserve’s November meeting showed that a growing number of Fed officials supported smaller interest rate hikes in the coming months to gauge the economic impact of a steep rise in interest rates this year.

Preliminary data for November showed that U.S. business activity contracted far more than expected under pressure from high interest rates and stubborn inflation.

While inflation eased more than expected in October, it still remained well above the Fed’s 2% annual target, necessitating more interest rate hikes by the central bank.

Fed members are also uncertain over where U.S. interest rates will peak, with a terminal rate during this hiking cycle appearing to be largely dependent on the path of inflation.

Among Antipodean currencies, the Australian dollar rose 0.4% on Thursday, although gains were somewhat held back by concerns over major trading partner China.

The New Zealand dollar extended strong gains into a second consecutive session, rising 0.6% to an over two-month high after the Reserve Bank hiked interest rates by a record pace, and signaled more hawkish moves to curb inflation.

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