MOST Asian currencies were set for monthly gains on Friday despite falling during the day, while the U.S. 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% in August as investors anticipate a decline in U.S. interest rates. Investors await the U.S. personal consumption expenditures (PCE) index data, the Fed's preferred measure of inflation later this Friday, and a significant labour market report next week for cues on the Fed's rate trajectory.
August was a bumpy road for financial markets, after worrisome U.S. 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%, 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 U.S. overnight led the market to pull back bets on aggressive rates by the Fed.
The Indonesian rupiah dipped about 0.4%, while the South Korean won and Taiwan dollar both fell more than 0.2%.
"I still do think the biggest driver in Asian currencies going forward will be the changes in the U.S.," 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. In Asia, Malaysia's central bank is set to conduct its monetary policy meeting next week.
Asian equities traded higher on Friday in line with global shares. Chinese stocks rose about 0.8%, while key indexes in Malaysia, South Korea and Singapore traded between 0.5% and 0.9% higher.
Regional markets will witness a string of inflation data from next week, including Indonesia, Taiwan, Thailand and South Korea, which could provide clarity on their respective interest rate paths.
HIGHLIGHTS:
** Core inflation in Japan's capital perks up, backs case for BOJ hikes
** Thai central bank chief, finance minister to meet over inflation target as govt eyes rate cut
** China's interest rate reform will be 'arduous, long' process - Reuters
