Asia FX weakens as yuan slides; dollar firm amid bets on smaller rate cut

Investing.com– Most Asian currencies drifted lower on Tuesday, with the Chinese yuan weakening sharply as onshore trade resumed after a week-long holiday. 

The dollar remained in sight of recent seven-week highs amid growing bets on a slower pace of interest rate cuts by the Federal Reserve- a trend that also weighed on most regional currencies.  

The Japanese yen was an outlier, with the USDJPY pair falling 0.3% as it recouped some measure of steep gains logged over the past week. Data showing steady wage growth and household spending also aided the yen.

Dollar edges lower amid bets on smaller rate cut; inflation awaited 

The dollar index and dollar index futures both fell about 0.2% each in Asian trade, retreating slightly from seven-week highs hit last week.

The greenback was boosted chiefly by stronger-than-expected nonfarm payrolls data, which furthered bets that the Fed will cut interest rates by a smaller margin in the coming months. 

Traders were seen pricing in a nearly 81% chance the Fed will cut rates by 25 basis points in November, and a nearly 19% chance for no changes to interest rates, CME Fedwatch showed.

Focus was now on the minutes of the Fed’s September meeting, due on Wednesday, for more cues on monetary policy. The Fed had slashed rates by 50 bps during the meeting, but had signaled a data-dependent approach to future cuts.

To that end, consumer price index inflation data due later this week is likely to factor into expectations for interest rates. 

Chinese yuan slides after week-long break 

The Chinese yuan was the worst performer in Asia on Tuesday, with the onshore USDCNY pair rising 0.7% as trade resumed after a week.

Sentiment towards China was boosted by a string of stimulus measures from Beijing, which include lower interest rates, looser property market restrictions and increased liquidity measures.

But increased liquidity and lower rates present more pressure on the yuan, especially with U.S. interest rates now expected to remain higher. 

Broader Asian currencies moved in a flat-to-low range. The Australian dollar’s AUDUSD pair fell 0.3% after the minutes of the Reserve Bank of Australia’s September meeting showed policymakers considering eventual interest rate cuts.

Separate data showed an improvement in Australian consumer sentiment, on expectations of lower rates. 

The South Korean won’s USDKRW pair rose 0.3%, while the Singapore dollar’s USDSGD pair was flat. 

The Indian rupee’s USDINR pair hovered near record highs.