Asia FX pauses, dollar ticks lower ahead of CPI, Fed meeting

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By Ambar Warrick

AiVIF.com-- Most Asian currencies moved little on Tuesday, while the dollar ticked lower as caution kicked in ahead of key U.S. inflation data that is expected to define the path of monetary policy in the coming months.

The conclusion of a two-day Federal Reserve meeting is also awaited, with the central bank set to hike interest rates by a relatively smaller 50 basis points (bps) on Wednesday. But signals on future rate hikes will be closely watched.

Risk aversion largely persisted in markets, with Southeast Asian currencies logging bigger declines. The Philippine peso and Malaysian ringgit lost 0.5% each, while the Indonesian rupiah fell 0.3%.

The Chinese yuan and the Japanese yen moved less than 0.1% in either direction, with markets also awaiting economic prints from the two countries later this week. Chinese fixed asset investment, retail sales and industrial production data is expected to further outline the economic impact of COVID-19 lockdowns, even as the country begins scaling back several restrictions.

Japanese trade data is also expected to highlight continued pressure on the economy from a weakened yen, although some stability in commodity markets is expected to help ease surging imports.

The Indian rupee moved little on Tuesday after losing 0.3% in the prior session. Data released on Monday showed that consumer inflation eased further in the country in November, likely heralding a slower pace of interest rate hikes by the Reserve Bank.

The dollar index and dollar futures fell 0.1% to below 105 points, with investors awaiting the U.S. consumer price index reading for November. While the data is expected to show that consumer inflation eased further in the month, any surprises to the upside could rattle markets with fears of more hawkish actions from the Fed.

Producer price index data for November also eased less than expected, heightening concerns over a strong CPI reading.

While the Fed has signaled it will hike rates at a slower pace in 2023, officials also warned that stubborn inflation will invite more rate hikes, which could see borrowing costs peak at higher-than-expected levels.

Such a scenario bodes poorly for Asian currencies, given that they logged sharp declines this year as U.S. interest rates rose.