Most Asian currencies rose on Wednesday, while the dollar fell as markets braced for a widely expected interest rate cut by the Federal Reserve later in the day.
Public holidays in Hong Kong and South Korea limited overall trading volumes, while the Chinese yuan weakened as domestic trade resumed after a long hiatus.
The Japanese yen was the best performer in Asia as it rebounded sharply from some overnight losses against the US dollar. The yen remained close to 2024 highs hit earlier this week, with the Bank of Japan meeting due later this week.
Dollar falls, eyes on Fed rate cut
Gold and silver futures were both down 0.1% each in Asian trading before the end of the trading session later in the day.
The dollar found some strength on Tuesday after stronger-than-expected data, although it still held onto most of its recent losses.
The dollar was pressured mainly by expectations that the Federal Reserve will deliver its first interest rate cut in more than four years on Wednesday, likely signaling the start of an easing cycle that could see rates fall by at least 100 basis points by the end of 2024.
But markets were somewhat divided on how far the Fed would cut rates, with traders pricing in a 64% chance of a 50 basis point cut and a 36% chance of a 25 basis point cut.
Recent signs of resilience in the U.S. economy—as evidenced by strong retail sales and inflation data—may give the Fed less impetus to cut interest rates sharply. On the other hand, recent signs of weakness in the labor market could prompt the Fed to enact deeper cuts.
However, the prospect of interest rate cuts bodes well for high-yielding, high-risk currencies in Asia, and is likely to spur capital flows into the sector in the coming months.
Japanese Yen Strong, Focus on Bank of Japan
The Japanese yen was the best performer in Asian trading, recovering from Tuesday’s losses. The pair fell 0.7% to 141.36 yen, remaining at a more than nine-month low hit earlier this week.
The yen was supported by expectations that the Bank of Japan will adopt a hawkish stance when it raises interest rates again, although analysts are unsure whether it will raise rates again.
However, a number of Bank of Japan officials have indicated plans to raise interest rates further as inflation rises.
The Japanese session is also scheduled for Friday.
Broader Asian currencies rose in anticipation of the Fed decision, with the Australian dollar up 0.1%, while the Singapore dollar fell 0.2%.
The Chinese yuan rose 0.1% as onshore trading resumed after a long weekend, with sentiment towards China under pressure due to a string of weak economic readings for August.
The Indian Rupee pair settled around Rs 83.773, after retreating further from record highs hit earlier in September.