Asian Currencies Shaken By Hawkish Fed Talk

Most Asian currencies fell on Wednesday and the dollar hit a three-month high after Fed Chairman Jerome Powell signaled a hawkish stance that could lead to higher interest rates.

In a congressional session, Powell said the recent resilience of the US economy means the Fed needs to take aggressive action to bring down inflation. This sees markets starting to price in a higher pace of interest rate hikes by the Fed in the coming months. DXY and dollar futures rose 0.2% to a three-month high on Wednesday, following a surge in US Treasury yields overnight. The US 2-year yield cleared the 5% level for the first time since 2007. A stronger dollar and more attractive yields have eroded Asian currencies, as the gap between low-risk yields narrows. The trend has hurt regional currencies into 2022 and is likely to persist in the near term. Markets are now awaiting more cues on the US economy from the Fed’s Beige Book report due later in the day, and the NFP data on Friday. Persistent concerns about China have also weighed, following mixed trade data and warnings of a potential conflict between the world’s two largest economies. China's yuan fell 0.2% and nearly breached the key 7 level against the dollar, triggering more losses in the currency. Data released on Tuesday showed that while the country posted a record trade surplus in February, its imports also fell more than expected, indicating weak demand in Asia's largest economy. The worst performing Southeast Asian currencies for the day were the Malaysian ringgit, down 1.2%, followed by the rupiah and the Philippine peso, which each fell 0.7%. 

The Japanese yen fell 0.5% and came under pressure as weak economic readings this week reinforced expectations the BoJ will keep its ultra-loose policy unchanged on Friday. Japan’s current account deficit widened more than expected in January, while data on Thursday is expected to reiterate that the Asian economy slowed substantially in the fourth quarter of 2022. A looming leadership change at the BoJ is also likely to see little impetus for a policy change. Elsewhere, the Indian rupee fell 0.2% in catch-up trade. The Aussie (AUD) rose 0.2% after falling sharply on Tuesday.

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