Asia FX rises as dollar stumbles, midterm elections in focus

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By Ambar Warrick

AiVIF.com-- Most Asian currencies rose on Wednesday, taking support from more weakness in the dollar as markets awaited the results of the hotly contested U.S. midterm elections, while the Chinese yuan lagged on more weak economic prints.

The South Korean won was the best performer in early trade, rising 0.8% to a two-month high after the country swung to a current account surplus in September. The currency was also supported by expectations that the Korean government will continue to support the won with regular intervention in foreign exchange markets.

The Japanese yen strengthened further to 145.51 against the dollar, gaining more relief from a weaker dollar. The currency recently slumped to its weakest level since 1992, as the gap between Japanese and U.S. interest rates widened.

The Malaysian ringgit led gains across Southeast Asia with a 0.4% rise.

Asian currencies were buoyed by recent losses in the dollar. The dollar index and dollar index futures fell 0.1% on Wednesday and were trading down more than 1% for the week amid growing uncertainty over the results of the midterm elections. A potential political deadlock is likely to ensure no major changes to fiscal policy in the coming years, which could benefit the greenback.

Growing expectations of smaller interest rate hikes by the Federal Reserve also benefited Asian currencies and weakened the outlook for the dollar. Markets are now pricing in a nearly 60% chance that the central bank will hike rates by 50 basis points in December, after several Fed officials said they supported the move.

Still, given that the central bank also signaled that interest rates will likely peak at a higher level than expected, the outlook for Asian currencies remained uncertain. U.S. CPI inflation data due on Thursday is expected to shed more light on the Fed's next move, as it struggles to control rising inflation.

The Chinese yuan lagged its peers on Wednesday, trading largely unchanged around 7.2479 to the dollar while the offshore yuan fell 0.3%.

Data showed Chinese inflation was much softer than expected in October, heralding more economic headwinds for the country as it struggles to navigate its worst COVID-19 outbreak since May.

A slowdown in China also bodes poorly for broader Asian markets, given the country’s role as a major trading hub.

Sentiment towards China was soured this week after authorities said Beijing has no plans to scale back its strict zero-COVID policy, which is at the heart of China’s economic woes this year.