Asian Currencies Weaken as Dollar Rises on Fed Hike Expectations; Yen Holds Firm

Most Asian currencies weakened on Monday as the U.S. dollar advanced on growing expectations of an imminent Federal Reserve interest rate hike. The Japanese yen, however, held near a seven-month peak as traders positioned for a policy tightening announcement from the Bank of Japan later in the week.

Dollar Gains on Hawkish Fed Outlook

The U.S. dollar index, which measures the greenback against a basket of major currencies, rose 0.2% to around 99.35. The move was driven by heightened market conviction that the Federal Reserve will raise interest rates at its upcoming policy meeting on Wednesday.

According to the CME FedWatch tool, markets are now pricing in an 86% probability of a rate hike, following recent data that showed an acceleration in U.S. consumer prices. This outlook has pushed U.S. Treasury yields higher, with the benchmark 10-year yield trading around 4.97% and the policy-sensitive two-year yield remaining above 4.6%.

Yen Awaits BOJ Policy Cues

In a notable divergence, the Japanese yen remained supported, with the USD/JPY pair trading at 154.03, leaving the yen near its strongest level since February. The currency has gained approximately 4% this month on expectations that the Bank of Japan (BOJ) will deliver another 25-basis-point interest rate hike at its meeting on Friday.

Ad

With a rate increase largely priced in by investors, the central bank's forward guidance on the pace of subsequent tightening will be a key driver for the currency. The shift in sentiment has also prompted a change in market positioning, with speculators turning net long on the yen for the first time since February, according to market data.

Regional Currencies and Market Context

The dollar's strength was felt across the wider Asia-Pacific region ahead of a pivotal week for global monetary policy, which also includes a decision from the Bank of England on Thursday. Rising energy costs, with Brent crude nearing $107.60 a barrel, are further complicating the outlook for central banks by threatening to keep inflation elevated.

• The Australian dollar weakened, with the USD/AUD pair rising 0.4% to 1.3991.
• The New Zealand dollar fell 0.5% against its U.S. counterpart to trade at $0.5782.
• The South Korean won slipped, with the USD/KRW pair gaining 0.25% to 1,344.86.
• China's yuan was largely steady against the dollar.