Asian currencies strengthened on Monday, with the Malaysian ringgit and the South Korean won leading the gains, as a weaker dollar and less hawkish signals from the Federal Reserve boosted risk appetite.
The dollar index, which measures the greenback against a basket of six major currencies, hovered near six-week lows as investors became more confident that the Fed is nearing the end of its aggressive rate hike cycle. The Fed signaled a willingness to slow the pace of rate hikes at its most recent meeting, and softer-than-expected US jobs data last week further reinforced this view.
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The weaker dollar benefited Asian currencies, with the Malaysian ringgit up 1.2%, the South Korean won up 0.5%, and the Thai baht up 0.2%. The Japanese yen also strengthened, but by a more modest 0.2%, as it continued to trade below the 150 level against the dollar.
The outlook for the yen remained weak following dovish signals from the Bank of Japan. Governor Kazuo Ueda reiterated on Monday that the BOJ will continue to maintain its ultra-loose monetary policy until inflation reaches its 2% target. This dovish stance has been a key source of pressure on the yen this year, which has been trading near levels last seen in 1990.
Meanwhile, the Chinese yuan rose slightly on Monday, benefiting from a weaker dollar and a stronger daily midpoint fix by the People’s Bank of China. However, focus is now squarely on trade and inflation data due this week, which is expected to shed more light on a sluggish economic recovery in the country.
The Australian dollar traded close to a two-month high on Monday as markets priced in a 25 basis point hike by the Reserve Bank of Australia on Tuesday. The RBA is widely expected to raise rates following a recent uptick in Australian consumer inflation and strong retail sales growth in the third quarter.
Overall, Asian currencies are likely to remain volatile in the near term as investors await key economic data and central bank decisions. However, the weaker dollar is expected to provide some support for Asian markets in the medium to longer term.