Asia FX weakens as hawkish Fed boosts dollar; yen rises on BOJ rate hike bets

Asian currencies faced pressure on Thursday as a stronger dollar gained momentum following hawkish Federal Reserve signals of slower rate cuts in 2025. Minutes from the Fed’s December meeting revealed concerns over inflationary risks tied to potential expansionary policies, pushing U.S. Treasury yields higher and weighing on most Asian currencies. Weak inflation data from China further dampened sentiment, highlighting persistent disinflation in the region’s largest economy despite Beijing’s recent stimulus efforts.

The Japanese yen emerged as an exception, strengthening speculation of a possible January interest rate hike by the Bank of Japan (BOJ). Stronger-than-expected wage data for November bolstered confidence in Japan’s inflationary outlook, with analysts suggesting a January rate hike is increasingly likely despite BOJ Governor Kazuo Ueda’s earlier caution about waiting until March wage negotiations. ING analysts noted that sustained wage growth and solid consumption trends provided a robust case for tightening monetary policy sooner.

Meanwhile, the Chinese yuan weakened, nearing its lowest level in 17 years as inflation data underscored prolonged disinflation. Broader Asian currencies also slipped, with the Australian dollar and South Korean won facing declines amid tepid economic signals. The Indian rupee remained steady near its key level, while the Singapore dollar showed minimal movement. Markets continue to grapple with the implications of a strong dollar and shifting monetary policies across major economies.