Asia FX treads water as Fed meeting looms, dollar inches higher

By Ambar Warrick

Investing.com -- Most Asian currencies moved little on Wednesday in anticipation of a Federal Reserve meeting, while the dollar crept higher as markets positioned for an interest rate hike and a potentially hawkish message from the central bank.

The dollar firmed slightly against a basket of currencies, with the dollar index and dollar index futures advancing about 0.1% each.

The Federal Reserve is broadly expected to hike interest rates by 25 basis points, after U.S. inflation retreated over the past few months. But comments from Fed Chair Jerome Powell on the path of monetary policy will be closely watched, given that recent data signaled some resilience in the U.S. economy.

Investors are also expecting Powell to address the recent rally in financial markets.

A hawkish outlook from the Fed is likely to weigh on Asian currencies, given that it indicates a further narrowing in the gap between risky and low-risk debt yields.

The Chinese yuan rose 0.1% on Wednesday to around 6.7492 against the dollar, as traders weighed contrasting data on the country’s manufacturing sector. While government data showed on Tuesday that the sector rebounded in January, a private survey painted a less rosy picture of the economy, as it moves away from three years of anti-COVID restrictions.

Still, optimism over a Chinese economic recovery drove the yuan to a seven-month high in January.

The Japanese yen was muted after data showed that the country’s manufacturing sector shrank further in January, following a weak reading on industrial activity on Tuesday.

Focus is also on the Bank of Japan, as it gears up to appoint a new governor ahead of a widely anticipated shift in monetary policy.

The South Korean won rose 0.2%, even as data showed that the country’s trade deficit worsened substantially in January. But South Korean finance minister Choo Kyung-ho said that the country will benefit from a Chinese reopening this year.

A Chinese economic recovery is set to benefit a bulk of Asian economies, which depend on the country as a trading partner. But the country is still coping with its worst yet COVID-19 outbreak, which could delay a bigger recovery.

Elsewhere, the British pound and the euro were also flat against the dollar, ahead of interest rate decisions by the Bank of England and the European Central Bank this week. Both banks are expected to hike interest rates by 50 basis points each.