Anna 
Wednesday, December 20, 2023
Most Asian currencies stabilized after recent gains on Wednesday, while the dollar remained close to four-month lows. Traders are largely maintaining bets that the Federal Reserve will initiate interest rate cuts in early 2024.
Despite warnings from Fed officials that enthusiasm for early rate cuts was overstated, a sustained decline in the dollar and Treasury yields indicates growing conviction that rates could start falling as soon as March 2024.
Rate-sensitive Asian currencies, including the South Korean won and the Australian dollar, were up between 0.1% and 0.2% on Wednesday, trading close to five-month highs.
The broader Asian currencies also rose slightly on Wednesday, maintaining strong gains over the past week, following the Fed’s signal that it has concluded raising interest rates and will lower them in 2024. Goldman Sachs predicts five cuts in 2024, with a majority biased toward the first half of the year.
Fed Fund futures prices suggest over a 67% chance of a 25 basis point cut in March 2024. Traders anticipate further rate cuts in April and May.
The dollar index and dollar index futures steadied in Asian trade, close to their weakest levels since early August. Lower U.S. rates diminish the dollar’s appeal, pushing investors toward higher-yielding, risk-driven assets.
Fed officials cautioned that this trade remains at risk, particularly if inflation persists and necessitates a higher-for-longer stance on rates from the Fed.
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.
The Japanese yen was flat after tumbling sharply from nearly four-month highs in the previous session. The yen’s weakness followed the Bank of Japan’s maintenance of its ultra-dovish stance in its last meeting for the year, signaling little intent to immediately tighten policy in 2024. Weak imports and exports data also contributed to the yen’s decline.
The Indian rupee remained flat near record lows, while the Singapore dollar experienced a slight rise.
