Anna 
In a session marked by restrained movements, most Asian currencies adhered to a narrow range on Wednesday, with the dollar hovering near five-month lows. This trend persists amid prevailing expectations that the Federal Reserve will initiate interest rate cuts early in 2024.
Asian currencies enjoyed significant gains in December following the Fed’s announcement of a pause in interest rate hikes. The softer-than-expected inflation data suggested the possibility of rate cuts as early as March 2024. However, these December gains only managed to mitigate the substantial losses Asian currencies incurred throughout the year, driven by high U.S. interest rates and a resilient dollar that prompted consistent outflows from risk-heavy, high-yielding currencies.
The outlook for most Asian currencies towards the end of 2023 appears muted, although a somewhat brighter perspective emerges due to the Fed’s indications of potential rate cuts in the coming year. Despite market optimism regarding early cuts, the timing of these planned cuts remains unclear.
Among Asian currencies, the Japanese yen lagged behind, having been the worst-performing in 2023. The Bank of Japan’s December meeting summary revealed a dovish stance, resulting in a 0.1% decline in the yen. While the central bank hinted at eventual policy tightening in 2024, the timing of such a move remains uncertain.
The broader Asian currency landscape reflects an underwhelming performance in 2023, with most regional central banks pausing rate hike cycles amid a cooling inflation environment. Notable movements include the Australian dollar’s 0.2% rise on Wednesday, set to end the year with a 0.2% gain. The Indian rupee is poised to lose 0.6% in 2023, while the South Korean won is down nearly 3%.
The Chinese yuan, among the worst performers in 2023, is on track for a 3.6% loss for the year, reflecting deteriorating sentiment towards the country amid a failure to materialize a robust post-COVID economic rebound.
With the dollar index and futures remaining relatively unchanged in Asian trade, pinned at five-month lows, the currency is anticipated to conclude 2023 with nearly a 2% loss. This decline, particularly pronounced in December, follows the Fed’s signals of pausing rate hikes and considering cuts in 2024. The market now expects the Fed to implement three to five rate cuts in 2024, although the central bank has provided limited signals on the extent of these planned cuts. Fed officials have cautioned against premature expectations of early rate cuts, emphasizing the persistence of sticky inflation.
