Investing.com–Most Asian currencies rose on Wednesday, while the dollar retreated as markets positioned for a widely expected Federal Reserve rate cut later in the day.
Market holidays in Hong Kong and South Korea limited overall volumes, while the Chinese yuan weakened as domestic trading resumed after an extended pause.
The Japanese yen was the best performer in Asia as it recovered sharply from some overnight losses against the dollar. The yen remained within sight of the 2024 peaks reached earlier this week, with a Bank of Japan meeting scheduled for later this week.
Dollar muted, Fed rate cut in focus
The and both fell 0.1% each in Asian trading before the end of a two-day decline later in the day.
The dollar found some strength on Tuesday after stronger-than-expected data, although it still retained most of its recent losses.
The dollar was mainly pressured by expectations that the Fed will make its first rate cut in more than four years on Wednesday, which would likely mark the start of an easing cycle that could push rates down by at least 100 basis points by the end of 2024.
But markets were somewhat divided on the extent to which the Fed will cut rates. Traders were pricing in a 64% chance of a 50 basis point cut and a 36% chance of a 25 basis point cut.
Recent signs of resilience in the US economy – as evidenced by strong retail sales and inflation data – could give the Fed less incentive to cut rates sharply. But on the other hand, recent signs of weakness in the labor market could prompt the Fed to implement deeper cuts.
Still, the prospect of lower interest rates bodes well for high-yield, high-risk currencies in Asia and is likely to boost capital flows into the sector in the coming months.
Japanese yen strong, BOJ in focus
The Japanese yen was the best performer in Asian trading after recovering from Tuesday’s losses. The pair fell 0.7% to 141.36 yen, remaining within sight of a nine-month low hit earlier this week.
The yen was supported by expectations that the BOJ will take a hawkish tone during the trade, although analysts are unsure whether interest rates will be raised again.
Still, a slew of BOJ officials signaled plans to raise rates further, along with higher inflation.
Japanese also comes on Fridays.
Broader Asian currencies rose in anticipation of the Fed’s decision. The Australian dollar pair rose 0.1%, while the Singapore dollar pair fell 0.2%.
The Chinese yuan pair rose 0.1% as domestic trading resumed after a long weekend, with sentiment towards China weighed on by a set of weak economic data for August.
The Indian rupee’s pair hovered around 83,773 rupees after retreating further from record highs earlier in September.
