Asian Currencies Firm as Dollar Weakens on Fed Rate Cut Bets
- admin cys
- Oct 23
- 5 min read
A Report by CYS Global Remit Counterparty Sales & Alliance Unit
USD/SGD | 1.2924 – 1.2932 |
Mixed Sentiment Across Asia Amid Policy Shifts and Trade Risks
Asian currencies strengthened broadly on Thursday, buoyed by growing market conviction that the U.S. Federal Reserve will cut interest rates in October. The prospect of a policy pivot, hinted at by Chair Jerome Powell’s recent dovish remarks, pushed the dollar lower and spurred demand for regional assets. However, gains across Asia were capped by renewed fears of a Sino-U.S. trade confrontation and diverging domestic monetary outlooks, most notably in Australia.
The composite dollar index slipped by 0.1%, while dollar index futures fell 0.3% in Asian trading, reflecting investor recalibration toward a looser U.S. policy stance. Treasury yields edged down for a third consecutive session, and gold prices hit fresh record highs, underscoring the prevailing risk aversion among investors even as they repositioned ahead of expected policy easing. Markets have increasingly priced in the likelihood of an October rate cut, with futures implying an over 70% probability. Powell’s comments that the Fed’s quantitative tightening cycle is “nearing its conclusion” were interpreted as a signal that policymakers are preparing to shift focus toward supporting growth, amid mounting signs of strain in the U.S. economy. The backdrop of a prolonged federal government shutdown—now in its third week—has intensified concerns over fiscal drag, with the U.S. Treasury warning that the standoff could shave as much as $15 billion off GDP each week it persists.
Australia’s Labor Woes Underscore Policy Divergence
While most Asian currencies benefited from the dollar’s retreat, the Australian dollar (AUD) underperformed, slipping 0.3% against the greenback. The weakness followed a disappointing September labour report that showed both a decline in employment growth and a sharp rise in the unemployment rate to a four-year high. Compounding the downbeat picture, August figures were revised lower, suggesting a steeper deterioration in labour market conditions than previously estimated.
The data reinforced speculation that the Reserve Bank of Australia (RBA) could move to cut interest rates as early as November. Markets now expect a 25-basis-point reduction, which would extend the central bank’s cumulative 75-basis-point easing cycle this year. The RBA has repeatedly highlighted inflation and employment stability as its key considerations in policy decisions, and with job growth faltering, pressure is mounting to act preemptively to prevent further weakening.
However, analysts remain divided. Some argue that sticky inflation in the third quarter could constrain the RBA’s ability to loosen policy further without reigniting price pressures. Recent wage growth data suggest that price momentum remains uneven, particularly in the services sector, which may compel the bank to pause until clearer disinflationary signals emerge. The RBA thus finds itself in a delicate balancing act—one that reflects the broader tension among global central banks attempting to navigate the final phase of post-pandemic policy normalization.
The Australian dollar’s underperformance also underscores the divergence between economies in the region. While some Asian central banks, such as those in India, Singapore, and South Korea, have largely maintained policy stability, Australia’s reliance on domestic demand and commodities has made its currency particularly sensitive to shifts in employment and inflation expectations.
Regional Currencies Gain Amid Political Uncertainty and Trade Tensions
Elsewhere in Asia, most currencies firmed modestly against the dollar. The Japanese yen (JPY) strengthened 0.2%, with the USD/JPY pair falling as political uncertainty mounted in Tokyo. The election of fiscal dove Sanae Takaichi as leader of the ruling Liberal Democratic Party (LDP) initially raised expectations of continued stimulus-friendly policies. However, the abrupt withdrawal of long-time coalition partner Komeito, coupled with murmurs of opposition parties nominating their own prime ministerial candidate, introduced new volatility. The political flux injected caution into Japanese markets, limiting the yen’s upside despite safe-haven inflows.
The South Korean won (KRW) and Singapore dollar (SGD) each gained about 0.1%–0.2%, supported by steady capital inflows and a softer dollar. However, both currencies remain vulnerable to external shocks, particularly if U.S. Treasury yields resume their climb or if trade tensions escalate.
In India, the rupee (INR) appreciated slightly by 0.1%, buoyed by optimism over a potential easing of U.S. trade tariffs. President Trump’s remarks that Prime Minister Narendra Modi had “assured” him of reduced Russian oil imports lifted market sentiment, suggesting room for improved bilateral trade relations. Nevertheless, investors remain cautious as the country’s large current account deficit continues to weigh on the rupee’s longer-term outlook.
Meanwhile, the Chinese yuan (CNY) remained largely steady after a strong week. The People’s Bank of China (PBOC) continued to set higher daily midpoint fixes, signalling its intent to anchor the yuan and curb speculative pressures. The currency managed to hold firm despite tepid inflation data for September, which pointed to persistent demand weakness in the world’s second-largest economy. Beijing’s policy priority remains stabilizing the yuan while fostering a gradual recovery in domestic consumption.
However, geopolitical risks continue to cast a shadow over the region. President Trump’s renewed threat to impose 100% tariffs on Chinese goods reignited fears of a potential trade war resurgence. Beijing swiftly denounced the move, calling it a violation of prior trade understandings. Markets have yet to fully price in the risk, but traders warn that any escalation could swiftly reverse gains across Asian currencies.
Outlook: Policy Shifts and Risk Sentiment to Drive Next Moves
The current market dynamic reflects a transitional phase in global monetary policy. The Fed’s pivot toward potential easing marks a significant shift after two years of tightening, and its timing could set the tone for emerging markets through year-end. A confirmed October rate cut would likely support further Asian currency gains, though the magnitude will depend on regional fundamentals and external risks.
In contrast, Australia faces a more complex policy debate. If the RBA opts for an additional rate cut in November, the AUD could weaken further, especially if inflation remains elevated. For Japan, the political outcome of the LDP leadership transition could determine whether fiscal stimulus continues or yields to consolidation, shaping the yen’s trajectory.
Broader risk sentiment also hinges on global developments beyond monetary policy. The U.S. government shutdown poses growing economic risks, while escalating U.S.-China tensions could reintroduce volatility in trade-sensitive currencies. With gold prices reaching record highs, investors appear to be hedging against both economic and political uncertainty—a trend that underscores the fragility of the current market optimism.
In sum, Asia’s currencies are benefiting from a softer dollar and growing bets on global easing, but structural challenges remain. Whether this marks the start of a sustained regional rebound or merely a brief reprieve will depend on how swiftly policymakers can navigate the crosscurrents of inflation, growth, and geopolitics in the months ahead. Source: