Asian Currencies Weaken as Dollar Holds Near Two-Month High on Hawkish Fed Bets

Asian currencies broadly weakened on Monday, led by a decline in the Japanese yen, as the U.S. dollar held near a two-month high. The dollar's strength was fueled by rising oil prices, elevated Treasury yields, and growing investor expectations that the Federal Reserve will maintain its aggressive monetary policy stance.

Dollar Buoyed by Inflation Fears and Fed Outlook

The U.S. dollar index, which measures the greenback against a basket of major currencies, traded around 101.12, an increase of 0.2%. The index is on pace for a monthly gain of approximately 1.7%, which would mark its strongest performance since June.

Several factors are underpinning the dollar's ascent:

• Rising Oil Prices: Brent crude futures climbed above $106 a barrel amid geopolitical tensions between the U.S. and Iran, heightening concerns about energy supply and persistent inflation.
• Hawkish Fed Expectations: Markets are increasingly pricing in the likelihood of further monetary tightening. According to the CME FedWatch tool, there is a 65% probability of another Federal Reserve rate hike at the end of October.
• Upcoming Economic Data: Investors are closely watching key U.S. economic reports this week, including the PCE inflation data on Wednesday and the nonfarm payrolls report on Friday, for further clues on the Fed's policy path.

Yen Slides Despite Official Concerns

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The Japanese yen slipped 0.3% against the dollar, with the USD/JPY pair trading at 157.78. The currency's weakness continues despite a recent rate increase by the Bank of Japan in September and a call between Japan's Finance Minister and the U.S. Treasury Secretary reaffirming concerns about yen undervaluation.

Markets remain skeptical that the Bank of Japan is moving quickly enough to close the significant interest-rate differential with the United States and other major economies, keeping the yen under sustained pressure.

Regional Currencies Await Central Bank Moves

Elsewhere in the Asia-Pacific region, currencies faced downward pressure. The Australian dollar was little changed at $0.70 ahead of the Reserve Bank of Australia's policy decision on Tuesday, where a 25-basis-point rate hike to 4.60% is widely expected.

The offshore Chinese yuan weakened, with the USD/CNH pair rising to around 6.72, as markets await manufacturing and services PMI data on Wednesday. Other regional currencies also declined, including the South Korean won (USD/KRW +0.2%), the Indonesian rupiah (USD/IDR +0.4%), and the Thai baht (USD/THB +0.6%).