Anna 
In the final trading session of the week, most Asian currencies remained within a narrow range, while the U.S. dollar hovered near four-month lows. Investors awaited additional confirmation of the Federal Reserve’s inclination to implement interest rate cuts earlier in 2024.
Throughout the week, regional currencies accrued modest gains, contributing to the dollar’s second consecutive week in the red. The dovish signals from the Fed prompted traders to factor in between three to five rate cuts by the central bank in the coming year.
However, the optimism in Asian currencies was tempered by uncertainty regarding the timing of these cuts, particularly as some Fed officials pushed back against expectations of imminent monetary easing.
The Japanese yen experienced a 0.3% decline, becoming one of the day’s notable underperformers. This drop followed November’s inflation data, which revealed a cooling Japanese economy leading to a 16-month low in the core consumer price index. While easing food prices played a role, the figures suggested reduced pressure on the Bank of Japan to deviate from its ultra-dovish policy, despite still being above the 2% annual target.
Although the Bank of Japan is anticipated to shift its ultra-dovish stance in 2024, the softer inflation reading introduced additional uncertainty about the timing of this move. The lack of clear signals during the recent BOJ meeting added to the yen’s challenges.
In broader Asian currency markets, caution prevailed as traders awaited key U.S. inflation data later in the day. The Australian dollar dipped 0.3%, retreating slightly from a nearly five-month high achieved in the prior session. Despite this, the currency was on track to add 1.3% for the week, buoyed by an improved risk appetite in the aftermath of the dovish Fed signals.
The South Korean won, sensitive to interest rate changes, lost 0.3%, while the Indian rupee remained near record lows against the dollar, surpassing the 83 mark.
The Chinese yuan continued to lag behind its counterparts, experiencing a 0.1% decline on Friday and heading for a 0.4% weekly loss. Lingering concerns over a sluggish economic rebound in China prompted caution among investors, with stocks bearing the brunt of this aversion.
The U.S. dollar index and dollar index futures showed minimal movement in Asian trade on Friday, having sunk to their lowest levels since early August. A slight downward revision in third-quarter U.S. GDP fueled optimism about potential interest rate cuts in 2024, although the overall reading still indicated robust economic growth in the U.S.
Investor focus shifted to the Personal Consumption Expenditure (PCE) price index, the Fed’s preferred inflation gauge, scheduled for later in the day. The anticipated reading, demonstrating persistent inflation, could provide the Fed with more reason to maintain higher interest rates for an extended period. Any signs of less dovish measures by the Fed in 2024 could trigger a pullback in Asian currencies, which have seen a strong performance in December. Market expectations currently position for a 25 basis point rate cut in March 2024, as indicated by Fed Fund futures prices.
