Asia FX firms, yen strong as dollar retreats on bets of bigger rate cut

Investing.com– Asian currencies firmed on Tuesday, with the Japanese yen close to a 2024 peak as the dollar retreated on growing bets the Federal Reserve will cut interest rates by a wide margin this week. 

Regional trading volumes were held back by market holidays in China and South Korea. Anticipation of Wednesday’s Fed decision also kept traders to the sidelines. 

Dollar retreats with 50 bps cut in focus 

The dollar index and dollar index futures both fell about 0.1% in Asian trade, extending losses from the prior session.

The greenback was dented by growing expectations that the Fed will cut interest rates by 50 basis points at the conclusion of a meeting on Wednesday. The central bank is also expected to kick off an easing cycle that could see interest rates fall by a total of 100 bps by the year-end. 

Traders are pricing in a 68% chance for a 50 bps cut and a 32% chance for a 25 bps cut, CME Fedwatch showed. 

Lower rates diminish the dollar’s appeal, and push traders to seek higher yields in riskier markets such as Asia. Such a scenario usually bodes well for regional currencies.

But the market was still grappling with weak sentiment on concerns over slowing economic growth in China. 

Still, most Asian currencies clocked some gains on Tuesday. The Australian dollar’s AUDUSD pair rose slightly, while the Singapore dollar’s USDSGD pair was flat.

The Chinese yuan’s USDCNH offshore pair fell slightly, with local markets closed for a second straight session. But a swathe of weak economic readings from the country, released over the weekend, primed the yuan for more weakness.

The Indian rupee’s USDINR pair pulled back further away from 84 rupees, having hit a series of record highs in August. 

Japanese yen firm, BOJ awaited 

The Japanese yen’s USDJPY pair steadied on Tuesday, remaining close to its lowest levels for the year.

The yen was boosted by the prospect of lower U.S. interest rates, while traders were also seen building long positions in the yen before a Bank of Japan meeting this Friday.

Analysts do not expect the BOJ to hike interest rates. But policymakers are expected to present a hawkish front and forecast higher interest rates in the face of a pick-up in inflation. 

Japanese consumer inflation data for August is also due on Friday, and is expected to show an increase.