Anna 
Asian currencies faced a broad retreat on Wednesday, with the U.S. dollar stabilizing after recent losses as markets awaited key U.S. inflation data that is anticipated to play a pivotal role in shaping interest rate expectations.
Throughout the first week of 2024, regional currencies experienced significant declines as market uncertainty grew regarding the possibility of the Federal Reserve initiating early interest rate cuts in the same year. This speculation fueled a rebound in the U.S. dollar, allowing it to recover sharply from five-month lows. Although Tuesday saw a bit of profit-taking, the dollar remained well above its December lows.
Among Asian currencies, the Japanese yen bore the brunt of the downturn in 2024, extending its decline from the previous year. Traders increasingly believe that the Bank of Japan (BOJ) will delay any departure from its ultra-dovish policies, given the need for rebuilding and stimulus measures after a devastating earthquake in central Japan. This scenario suggests prolonged pressure on the yen, exacerbated by the considerable gap between local and international lending rates, which have been held at ultra-low levels in Japan for nearly eight years.
Broader Asian currencies trended lower as doubts over early Fed rate cuts persisted, maintaining a bias toward the dollar. The Chinese yuan slipped 0.1% ahead of key inflation and trade data, expected to reveal modest improvement in Asia’s largest economy. Lingering concerns about China had weighed on the yuan in 2023, while the People’s Bank faced challenges in supporting the currency.
The Indian rupee fell 0.1%, despite a recovery from near-record lows attributed to central bank support. Attention now turns to Indian consumer price index (CPI) inflation data due on Friday. The South Korean won held steady before a Bank of Korea meeting on Thursday, where rates are expected to remain unchanged.
In contrast, the Australian dollar stood out, rising 0.3% as CPI inflation eased in November but remained above the Reserve Bank’s annual target. The dollar index and dollar index futures showed minimal movement in Asian trade, with attention focused on upcoming U.S. CPI data. While expectations suggest a slight rise in December inflation, persistent inflation coupled with labor market strength provide the Federal Reserve with room to maintain higher rates for an extended period. Market skepticism has grown regarding early rate cuts in 2024, with Fed officials pushing back against such expectations, emphasizing the anticipation of inflation remaining above the 2% annual target in the near term.
