Most Asian currencies and stocks fell on Tuesday in broad-based selling with the South Korean won and Thai baht leading the laggards, while the dollar gained as traders assessed the outlook for rate cuts by the US Federal Reserve.
The MSCI emerging markets currency index fell about 0.3% to hover near a one-month low.
The South Korean won suffered the biggest decline, dropping as much as 0.8%, bringing its losses to more than 3% since the start of 2024.An unexpected drop in US producer prices in December reinforced the view that Fed rate cuts could come as soon as March.
Markets are now pricing in a 70% chance of a 25 basis points cut in March, versus 63% a week earlier, the CME FedWatch Tool showed.
Traders are back projecting cuts of 160 bps this year, up from expectations of 140 bps last week, though many analysts think that is too aggressive.
European Central Bank officials on Monday pushed back on expectations on slashing interest rates, with Bundesbank President Joachim Nagel saying it was too early to discuss cuts.
Asian currencies subdued after US inflation; set for weekly losses
At 0355 GMT, the dollar index was at 102.88.
“We continue to stay wary of the risk that DXY may inch up higher amid risks of some fine tuning in the aggressive Fed rate cut bets,” analysts at Maybank wrote.
Market participants now await Fed Governor Christopher Waller’s speech later on Tuesday.
He made a shift from his traditionally hawkish stance in November.
Investors were also cautious on the uptick in Brent crude prices after geopolitical tensions in the Middle East escalated leading to a spike in shipping rates between Asia and Europe, which could potentially add to existing inflation woes.
Among other Asian currencies, the Thailand baht, Philippines peso , Malaysian ringgit and the Singapore dollar slipped between 0.2% and 0.5%.
The Taiwan dollar extended its losses for the third consecutive session, falling about 0.6%.
The country’s Democratic Progressive Party’s candidate Lai Ching-te won the presidency on Saturday for the party’s third consecutive term, even as the party lost its parliamentary majority.
Analysts at both DBS and Saxo Markets, however, expect stability to return for North Asian currencies like the South Korean won and the Taiwan currency, as geopolitical risks remain contained, while an upturn in the semiconductor cycle is extended further.
Among Asian equities, Seoul, Taipei, Bangkok fell between 0.4% and 0.6%, while Jakarta shares traded 0.3% higher.