SOUTH-EAST ASIA (Reuters): Currencies in emerging Asian markets edged higher on Tuesday, although gains were capped by a strong dollar buoyed by rising bets that strong US economic data will lead to an early end to the Federal Reserve's easing cycle.
South Korea's won advanced as much as 0.5% before erasing some of the gains to finish 0.3% higher.
Malaysia's ringgit and the Philippine peso each nudged 0.2% higher, while China's yuan rebounded slightly but remained near 16-month lows.
A strong US jobs report last week reinforced confidence in the Fed's cautious approach to further monetary policy easing, leading traders to reduce their bets for rate cuts this year.
This helped the dollar, which is trading a few pips shy of its 26-month high of 110.17 touched on Monday. Traders are pricing in 29 basis points of easing this year, less than the 50 basis points of reductions the Fed projected in December.
A stronger dollar reduces the appeal of risk-sensitive emerging-market assets, leading to capital outflows which pressure the local currencies. This could prompt a reassessment of monetary policy by the central banks in emerging economies.
"With the strong dollar story, Asian central banks are well cognisant about where their currency is currently holding, and they will be very reticent in terms of adding volatility by cutting interest rates too much," United Overseas Bank's interest rate strategist, Victor Yong, said at a forum in Singapore.
Globally, investors are now focusing on the U.S. inflation report, due on Wednesday, where a rise in the core measure could threaten to close the door on easing altogether.
Sticky annual inflation of around 3% would mean "there would no longer be any narrative for the Fed to cut rates", said Eugene Leow, senior rates strategist at DBS.
In South Korea, the central bank is expected to deliver a quarter-point rate cut on Thursday, a month earlier than initially anticipated, as the Bank of Korea (BoK) focuses on supporting a faltering economy at a time of rising political uncertainties.
Analysts at Citi predict a quarter-point rate cut in their base case scenario.
They believe a rate cut will have a "limited impact" on the weak won, which faces headwinds from the dollar's broad-based strength and potential weakness in China's yuan. Most stock markets in the region rose, led by Taiwan and China, which climbed about 1.4% and 2.5%, respectively.
That helped the MSCI index of equities in emerging Asia rise 1.5%, rebounding from a five-month low touched in the previous session. - Reuters
