Asia FX Edges Lower as Dollar Steadies Ahead of Midterm Election

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By Ambar Warrick

AiVIF.com-- Most Asian currencies fell slightly on Tuesday as the dollar stabilized after recent losses, with focus now turning to the U.S. midterm elections, which could herald major changes in U.S. economic policy.

U.S. voters are set to decide on which party will take both bodies in Congress in what appears set to be a heavily contested election between the incumbent Democrats and the Republicans. An element of caution also persisted in markets ahead of the election.

China’s yuan fell 0.1%, while the offshore yuan lost 0.2% amid waning hopes that the government will scale back COVID lockdowns in the near future.

But the currency still retained gains made over the past week, when speculation over the lifting of lockdowns drove a mad rush into heavily discounted Chinese markets.

The Japanese yen traded flat at about 146.64 to the dollar but was trading near its strongest level to the dollar in nearly a month. The currency, which plummeted to a 32-year low in October, took great relief from a softer dollar.

But Japan's foreign exchange reserves fell further in October, as the government ramped up intervention efforts to support the yen

Asian currencies logged strong gains over the past two sessions, helped chiefly by a weaker dollar after several Fed members said they supported smaller interest rate hikes going forward.

Such a scenario would entail lesser immediate pressure on Asian economies from rising U.S. interest rates, which is beneficial for regional currencies. The dollar index and dollar index futures both rose 0.2% on Tuesday, but were trading close to a two-week low, nursing an over 2% drop in the past two sessions.

Traders are now pricing in a 52% chance that the Fed will hike interest rates by 50 basis points in December- a smaller hike than the 75 basis point raise in November.

Focus this week is also on U.S. CPI inflation data due on Thursday, which is expected to show that price pressures remained stubbornly high in October. A stronger-than-expected reading could potentially ratchet up expectations of more hawkish moves by the Fed.

Rising U.S. interest rates weighed heavily on Asian markets this year, as the gap between risky and low-risk debt narrowed. Even if the Fed were to lower its pace of rate hikes, high U.S. rates are expected to continue weighing down Asian currencies this year.

Among Antipodean currencies, the Australian dollar shed 0.2% after data showed the country’s consumer sentiment fell sharply in early November due to rising interest rates and high inflation.