Asia FX Weakens as Yuan Declines; Dollar Strengthens on Expectations of Smaller Rate Cut

Most Asian currencies experienced a decline on Tuesday, with the Chinese yuan facing a significant drop as onshore trading resumed following a week-long holiday.

The U.S. dollar remained close to seven-week highs, driven by expectations of a slower pace of interest rate cuts from the Federal Reserve, a sentiment that negatively impacted many regional currencies.

The Japanese yen stood out as an exception, with the USD/JPY pair decreasing by 0.3%, recovering some of the substantial gains from the previous week. Positive data reflecting steady wage growth and increased household spending provided support for the yen.

The dollar index and its futures both fell by approximately 0.2% during Asian trading, easing slightly from the recent seven-week peaks. The dollar had gained strength primarily due to better-than-anticipated nonfarm payrolls data, which further solidified expectations that the Fed would reduce interest rates by a smaller margin in the near future.

Traders were pricing in an almost 81% probability that the Fed will cut rates by 25 basis points in November, with around a 19% chance of maintaining current rates. Attention is now focused on the release of the Fed’s September meeting minutes, expected on Wednesday, for additional insights into monetary policy. In that meeting, the Fed had implemented a 50 basis point cut but indicated that future adjustments would depend on forthcoming data.

This week’s consumer price index inflation report will likely influence expectations regarding interest rates.

The Chinese yuan was the worst-performing currency in Asia on Tuesday, with the USDCNY pair increasing by 0.7% as trading reopened. Sentiment towards China had improved due to several stimulus measures introduced by the government, including lower interest rates and looser property market restrictions.

However, the introduction of increased liquidity and reduced rates is expected to exert more pressure on the yuan, especially as U.S. interest rates remain projected to stay elevated.

Other Asian currencies remained mostly stable. The Australian dollar’s AUD/USD pair decreased by 0.3% following the release of the Reserve Bank of Australia’s September meeting minutes, which indicated that policymakers were contemplating potential interest rate cuts. Nonetheless, separate data revealed an uptick in Australian consumer sentiment, fueled by expectations of lower rates.

Meanwhile, the South Korean won’s USD/KRW pair rose by 0.3%, while the Singapore dollar’s USD/SGD pair remained unchanged. The Indian rupee’s USD/INR pair hovered near its record highs.