BENGALURU- Most Asian currencies hit monthly gains on Friday despite falling during the day, while the US dollar was poised for its worst month in nine as markets priced in a definite rate cut by the Federal Reserve in September.
The dollar index has depreciated nearly 2.7 percent in August as investors anticipate a decline in US interest rates.
Investors await the US personal consumption expenditures (PCE) index data, the Fed’s preferred measure of inflation later this Friday, and a significant labor market report next week for cues on the Fed’s rate trajectory.
August was a bumpy road for financial markets, after worrisome US data at the start of the month triggered concerns of a recession.
Moreover, the Bank of Japan’s unanticipated rate hike led to a massive unwinding of carry trade in the Japanese yen, which weighed heavily on the dollar.
In emerging Asian markets, the Malaysian ringgit has had a stellar run with a year-to-date gain of nearly 6.4 percent , its strongest monthly performance since March 2016, while the Indonesian rupiah was set for its best month since April 2020.
“What gives us some comfort that this is a broad dollar decline is the fact that the Asian FX laggards are all participating in the move,” ING analysts wrote in a note.
On Friday, however, most emerging Asian currencies fell against a stronger dollar after robust economic data from the US overnight led the market to pull back bets on aggressive rates by the Fed.
The Indonesian rupiah dipped about 0.4 percent , while the South Korean won and Taiwan dollar both fell more than 0.2 percent .
“I still do think the biggest driver in Asian currencies going forward will be the changes in the US said Gary Ng, a senior economist at Natixis.
“I think the market has been pricing the aggressive Fed rate cut a bit too far in Asia, so it’s possible to see some pullback in Asian currencies,” he added.
Traders are now wagering more on a 25 basis point rate cut in the upcoming Fed meeting than a 50 bps cut.
