Asia currencies soften on outflow worry ahead of Fed outcome

Asian currencies edged lower on Wednesday, ahead of the US Federal Reserve's policy decision on fears that a hawkish tone could affect regional assets and trigger more capital outflows. Beside the expected announcement of a quarter-point rate rise, investors will be looking for clues on the pace of future rate hikes from the Fed's "dot plot" that could signal whether most of its policy committee now expect more than three rate increases this year.
The "dot plot" is policymakers' rate projections and provides a view into their interest rate outlook. "Given that, it is the combination of higher Fed rates and the run down in its balance sheet that is pressuring emerging markets, an aggressive Fed puts more pressure on Asian currencies," said Greg McKenna, Chief Market Strategist at AxiTrader.
The dollar index against a basket of six major currencies inched up 0.03 percent to 93.829 after rising 0.25 percent the previous day. The Indian rupee dropped 0.2 percent on concerns over price pressures, after data on Tuesday showed retail inflation accelerating to a four-month high of 4.87 percent in May.
The Malaysian ringgit also shed 0.15 percent on weak equities, lower oil prices and foreign outflows. In May, foreigners sold a net $4.7 billion in Malaysian bond and equity markets, the biggest amount in more than a year. The Philippine peso touched its lowest since June 2006 on concerns over the country's high inflation rates.
Inflation picked up further in May, bringing the average rate in the first five months of the year to 4.1 percent, outside the central bank's 2-4 percent comfort range. On Wednesday, the Philippine central bank said it will consider not just recent inflation data but all potential drivers of future inflation when it reviews monetary policy next week.
Investors were also watching out for the European Central Bank policy meeting on Thursday, in which it could signal intentions to start unwinding its massive bond purchasing programme. "We still think ECB may not commit to a decision on exit prematurely before inflation shows signs of reacceleration but the narrative out of the debate (hawkish hold) could still be supportive of EUR," Saktiandi Supaat, head of FX research at Maybank in Singapore, said in a report.