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Asia FX Rises as Interest Rates and Dollar Slow for the Year

Most Asian currencies saw an increase on Tuesday as markets predict slower interest rate hikes and a weaker dollar in the coming year.

Japanese Yen Banknotes
Japanese Yen Banknotes

The Japanese yen saw particularly significant growth, rising 0.7% and reaching a seven-month high against the dollar at 129.74. The currency has been steadily increasing since early December when the Bank of Japan's hawkish tone sparked speculation that they may tighten their ultra-loose monetary policy in 2023. The central bank will meet on January 18th, and while interest rates are expected to remain unchanged at record lows, any changes to yield curve control measures will be closely observed.

Expectations of a Slower Federal Reserve Boosts Asian Currencies

In addition to the Japanese yen, other Asian currencies also saw growth due to the belief that the Federal Reserve will raise rates at a slower pace this year. The Chinese yuan increased by 0.3%, and the offshore yuan rose by 0.5%, hoping the economy will eventually recover from COVID-related restrictions in the coming year. However, rising COVID-19 infections in China are expected to hinder short-term growth, and data released on Tuesday showed that the country's manufacturing sector has declined for the fifth consecutive month.

Southeast Asian Currencies See Strong Gains

Risk-heavy southeast Asian currencies also saw significant gains, with the Thai baht rising by 0.6% and the Singapore dollar increasing by 0.3%. While the Singapore dollar saw a boost, data showed that the country's GDP nearly halved in the fourth quarter. Overall, Asian currencies took comfort in the prospect of smaller interest rate hikes by the Federal Reserve this year, as most regional units saw steep losses in 2022 due to the Fed's aggressive rate hike spree. However, with signs that U.S. inflation may be peaking, the central bank is expected to adopt a less hawkish stance.

Dollar Index and Dollar Index Futures Steady, Awaiting U.S. Economic Indicators

The dollar index and dollar index futures steadied around 103 on Tuesday, but both were trading close to seven-month lows. This week, traders will be closely watching for major U.S. economic indicators, including nonfarm payrolls for December and the minutes from the latest Federal Reserve meeting, for any signals on whether the bank plans to slow its pace of interest rate hikes further this year. Currently, markets are pricing in a greater than 90% probability that the Federal Reserve will raise rates by 25 basis points in February.