Most Asian currencies steadied from recent gains on Wednesday, while the dollar remained pinned near four-month lows as traders largely stuck to bets that the Federal Reserve will begin trimming interest rates in early 2024.
Traders also largely looked past warnings from Fed officials that enthusiasm over early rate cuts was overplayed, with a sustained decline in the dollar and Treasury yields pointing to growing conviction that rates could begin falling by as soon as March 2024.
This notion boosted most risk-driven assets, with rate-sensitive Asian units such as the South Korean won and the Australian dollar up between 0.1% and 0.2% on Wednesday. The two were also trading close to five-month highs.
Fed rate cut bets persist, March 2024 seen as start of easing cycle
Broader Asian currencies rose slightly on Wednesday, and were sitting on strong gains over the past week, after the Fed signaled that it was done raising interest rates and will lower rates in 2024.
The move triggered sharp losses in the dollar, and spurred increased speculation over when the central bank will begin trimming rates. Goldman Sachs expects five cuts in 2024, with a majority of them biased towards the first half of the year.
Fed Fund futures prices show traders pricing in an over 67% chance for a 25 basis point cut in March 2024. The central bank is also expected to trim rates further in April and May.
The dollar index and dollar index futures steadied in Asian trade, and were close to their weakest levels since early-August. Lower U.S. rates lessen the dollar’s appeal, and push investors into higher-yielding, risk-driven assets.
But Fed officials warned that this trade remains at risk, especially if inflation remains sticky and necessitates a higher-for-longer stance on rates from the Fed.
Chinese yuan lags as PBOC leaves rates static
Dovish moves from Asian central banks weighed on some regional units. The Chinese yuan fell 0.1% to 7.1346 against the dollar, after the People’s Bank of China left its loan prime rate unchanged at record lows.
While the move was widely expected, it highlighted just how little headroom the PBOC had to keep policy loose and support an economic recovery in China.
The Japanese yen was flat after tumbling sharply from near four-month highs in the prior session. The yen’s weakness came as the Bank of Japan maintained its ultra-dovish stance in its last meeting for the year, and signaled little intent to immediately begin tightening policy in 2024.