Most Asian currencies slipped on Thursday after the US Federal Reserve reined in market expectations of further interest rate cuts and as investors awaited regional central bank policy decisions. The Fed cut interest rates on Wednesday, as expected, to help sustain a record-long economic expansion, but signalled it would set a higher bar for further reductions.
The Fed's cautious outlook drove the greenback higher against major currencies, with the exception of the Japanese yen. "In the wake of the FOMC (Federal Open Market Committee), Asian currencies not only have to contend with a firmer USD complex, but also the potential vulnerability to another bout of risk aversion," a note from OCBC said.
The yuan slipped 0.2%, with market focus now on China's new lending reference rate decision on Friday, following the Fed's rate cut, to see if there will be further easing and if so, to what extent. Investors also pulled back from riskier assets, with the Korean won declining the most in the region, while the Malaysian ringgit weakened 0.3%.
Meanwhile, the Indonesian rupiah weakened 0.2% ahead of Bank Indonesia's rate decision later in the day, with a small majority of economists predicting a rate cut according to a Reuters poll. The Taiwan dollar on the other hand was little changed, with the market expecting the island's central bank to keep rates on hold for the 13th consecutive session later on Thursday.
The South Korean won shed 0.4% against a firmer dollar after a Bank of Korea board member signalled the possibility of further rate cuts despite interest rates approaching record lows. Board member Shin In-seok said interest rates should be cut further to deal with weak inflation and also dismissed concerns that rates going below the historic low could spark capital flight.
The central bank chief also said that heightened external uncertainties are still a top factor in considering rate policy. The central bank is widely expected to cut its policy rate by a quarter-point at its next review on Oct. 16. The market, however, remained wary considering the won is already by far the worst performing currency in the region this year, having lost 6.8% to the US dollar.