Asia FX extends new year gains, Japanese yen surges to 7-mth high

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By Ambar Warrick

AiVIF.com-- Most Asian currencies rose on Tuesday, extending gains as markets bet on slower interest rate hikes and a weaker dollar this year, with the Japanese yen surging to a six-month high on expectations of tighter monetary policy.

The yen jumped 0.7% and was the best-performing currency in Asia, hitting a seven-month high of 129.74 against the dollar. The currency has been on a tear since early-December, when the Bank of Japan unexpectedly struck a more hawkish tone than markets were expecting, which ramped up expectations that it could tighten its ultra-loose policy in 2023.

The Japanese central bank is now set to meet on January 18, with markets expecting its interest rates to remain unchanged at record lows. But any further changes to its yield curve control measures will be closely watched.

Broader Asian currencies rose on growing expectations that the Federal Reserve will raise rates at a slower pace this year.

China’s yuan rose 0.3%, while the offshore yuan added 0.5% on hopes that the economy will eventually reemerge from COVID-related restrictions this year.

While Beijing has begun scaling back a bulk of its strict anti-COVID measures, the country is also facing an overwhelming spike in COVID-19 infections, which analysts say are likely to hamper growth in the near-term.

Data released earlier today also showed that China’s economy continues to struggle with rising infections. The country’s manufacturing sector logged a fifth straight month of declines.

Risk-heavy southeast Asian currencies logged strong gains. The Thai baht jumped 0.6%, while the Singapore dollar added 0.3% even as data showed the island state’s GDP nearly halved in the fourth quarter.

Asian currencies took much relief from the prospect of smaller interest rate hikes by the Fed this year. Most regional units logged steep losses in 2022 as the Fed embarked on one of its most aggressive rate hike sprees. But with signs that U.S. inflation may now be peaking, the central bank is expected to tone down its hawkish rhetoric.

The dollar index and dollar index futures steadied around 103 on Tuesday, but were both trading close to seven-month lows. Markets are awaiting a slew of major U.S. economic indicators this week, including nonfarm payrolls for December and the minutes of the Fed’s latest meeting.

Traders will be closely watching for any signals from the meeting on whether the bank intends to further slow its pace of interest rate hikes this year. Markets are pricing in an over 90% probability that the bank will raise rates by 25 basis points in February.