Asia FX Weakens as Dollar Strengthens on Expectations of Smaller US Interest Rate Cut

Most Asian currencies experienced declines on Monday, with the Japanese yen sustaining significant losses. Meanwhile, the dollar stabilized following a recent rebound, as stronger-than-expected payroll data led to expectations of a smaller interest rate cut.

Trading volumes across the region were dampened due to a holiday in China, with markets set to resume on Tuesday.

Asian currencies faced steep losses from the previous week, as positive U.S. nonfarm payrolls data diminished expectations for substantial interest rate cuts by the Federal Reserve. Market bets have shifted to anticipate a smaller reduction in November.

The dollar index and its futures showed little movement in Asian trading after registering notable gains last week, particularly after Friday’s payroll data. The robust employment figures alleviated concerns about a potential U.S. economic slowdown and reinforced the view that the Fed may not need significant rate cuts to support the economy.

Traders have largely dismissed the idea of a 50 basis point cut in November, now estimating over a 90% chance of a 25 basis point reduction. Attention this week will be on speeches from various Fed officials and the release of the minutes from the Fed’s September meeting. During that meeting, the Fed announced a 50 basis point cut and the beginning of an easing cycle, though it emphasized that any future reductions would depend on incoming data.

Consumer price index inflation data for September is also expected later this week, which may influence the Fed’s rate outlook. However, the prospect of smaller rate cuts is likely to create a less favorable environment for Asian markets.

The Japanese yen was the weakest performer among regional currencies over the past week, with the USDJPY pair reaching its highest level since mid-August. Growing uncertainty about the Bank of Japan’s ability to continue raising interest rates, especially ahead of upcoming general elections, has weighed on the yen.

Recent economic data has indicated limited strength in Japan’s economy, potentially restricting the BOJ’s capacity to pursue further rate hikes.

Other Asian currencies showed muted performance following last week’s significant losses, though overall declines were somewhat mitigated by optimism for additional stimulus measures in China. The country’s lead economic planner is scheduled to hold a briefing on Tuesday to outline further economic support.

The Australian dollar rose by 0.2%, while the South Korean won gained 0.1%. The Singapore dollar and the Indian rupee remained relatively stable, with the latter staying close to record highs.