Asia FX rises after sharp losses, but China, Fed fears persist

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By Ambar Warrick

AiVIF.com-- Most Asian currencies rose slightly on Tuesday as they recovered from sharp declines in recent sessions, although hawkish comments from some Federal Reserve officials and concerns over rising COVID-19 cases in China kept markets subdued.

China’s yuan rose 0.2% to 7.1518 against the dollar, recovering from a 10-day low despite a slightly bearish midpoint fix by the People’s Bank.

But sentiment towards the world’s second-largest economy remained subdued, especially as it grappled with its worst COVID outbreak yet. Record-high daily infections prompted new lockdown measures in several economic hubs including Beijing and Shanghai.

This soured sentiment towards broader Asian currencies this week, given the country’s status as a major trading partner for most of the region. The currencies of China-exposed countries, including South Korea and Singapore, fell sharply on Monday.

The South Korean won recovered 0.5% on Tuesday, while the Singapore dollar added 0.1%.

Meanwhile, the dollar index and dollar index futures steadied on Tuesday after rallying 0.8% overnight, following a slew of hawkish signals from some Fed officials.

San Francisco Fed President Mary Daly said on Monday that the central bank still needs to tighten monetary policy more in order to curb inflation, while Cleveland Fed Chief Loretta Mester said she supports a smaller, 50 basis point rate hike in December. But both speakers said the Fed’s approach to interest rates will be largely dependent on the path of inflation in the coming months.

While inflation eased more than expected in October, it still remained well above the Fed’s target, which is likely to invite more rate hikes by the bank. This is expected to boost the dollar and pressure Asian currencies in the near-term.

Focus now turns to the minutes of the Fed's November meeting, due on Thursday, for more cues on U.S. monetary policy.

The Japanese yen rose 0.3% from a 10-day low on Tuesday, while the Indian rupee was flat.

The Indian currency has lagged its regional peers in recent weeks as falling inflation in the country saw markets pricing in a smaller interest rate hike by the Reserve Bank in the coming months.

In Southeast Asia, the Malaysian ringgit fell 0.1%, extending losses as a political deadlock showed no signs of lifting after a hotly contested general election resulted in the country’s first-ever hung parliament.