Asia FX edges higher, but hawkish Fedspeak limits gains

Asia FX edges higher, but hawkish Fedspeak limits gains
Asia FX edges higher, but hawkish Fedspeak limits gains
© Reuters.

By Ambar Warrick — Asian currencies rose slightly on Friday as they recovered from a series of bruising sessions, with sentiment remaining constrained after hawkish signals from the Federal Reserve drummed up fears of more rate-hike action by the central bank.

was among the best performers in the region, rising 0.4%. But the currency was set to lose about 0.3% this week as concerns over rising COVID-19 cases and softening economic growth weighed.

The rose 0.2% as data showed surged to a 40-year high in October. The reading, which heralds increasing pressure on the Japanese economy, drove speculation that the may be forced into eventually tightening monetary policy.

The bank has maintained ultra-low interest rates for the better part of a decade, and has so far given no indication that it plans to raise them. But this has also caused a sharp decline in the yen this year, as rising interest rates in other countries saw traders sell the yen in favor of better yields.

The and traded flat on Friday, but were set to gain slightly for the week after hawkish signals from the Fed saw markets reassess their expectations of more interest rate hikes.

said on Thursday that even under a dovish assumption of monetary policy, the Fed still needs to keep raising interest rates given that rate hikes this year have only had a limited effect on inflation.

Bullard said interest rates need to rise to at least 5% to 5.25% from current levels of near 4% to be able to sufficiently curb inflation. While data this month showed softened more than expected in October, Bullard noted that this could easily change in the next month.

His comments boosted the dollar in overnight trade, and also supported . This spurred losses across most Asian currencies on Thursday.

While markets are still pricing in a by the Fed in December, Bullard’s comments tie in with signals from Fed Chair Jerome Powell that rates could peak at higher levels than initially thought.

In Southeast Asia, the rose 0.3%, supported by a bumper 75 basis point rate hike by the . The bank also forecast more hawkish moves to curb inflation and to match the Fed’s pace of rate hikes.

Losses in the were also limited after the country’s hiked rates on Thursday and signaled more action against inflation.

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