Asian currencies index highest since July 2023 after Fed cut

Asian currencies advanced to the strongest level in more than a year after the Federal Reserve kicked off policy easing and signaled further interest-rate reductions this year.

The Bloomberg Asia Dollar Index rose 0.2% on Thursday, bringing the gauge to the highest since July 2023. The Indonesian rupiah and South Korean won led the gains, while the Malaysian ringgit climbed to the highest since 2022.

The Fed announced a half-percentage-point rate cut on Wednesday and released updated projections predicting another 50 basis points of easing in 2024, weakening the US dollar. Other emerging-market currencies also rose including the Mexican peso and the South African rand.

“We expect to see further, albeit limited, appreciation in Asian currencies in the fourth quarter, amid some further dollar weakness, but we expect much of this to be reversed into 2025,” Barclays Plc strategists including Mitul Kotecha wrote in a note on Thursday. 

ASIA GROWTH

While dollar weakness is bolstering Asian currencies, better growth prospects in Asia are providing a further tailwind. Manufacturing sentiment appears resilient in the region, with August data in South Korea, Philippines, Thailand, Taiwan, India and China pointing toward expansionary expectations. 

“Asia FX performance can extend, but there will be losers and winners,” said Alvin Tan, head of Asia FX strategy at Royal Bank of Canada in Singapore. “Asia’s growth and policy outlooks are varied, and this will give rise to varied FX performance. The Chinese yuan and Indian rupee will lag, while Southeast Asia FX and the won can outperform.”

The strength in Asian currencies is likely to give more room for local central banks to reduce rates without harming currencies. The rupiah is trading close to the strongest level versus the dollar in a year, even after Bank Indonesia cut its key rate on Wednesday.