Asian Currencies Tumble as Dollar Surges on Hawkish Fed Outlook and Regional Economic Concerns
Asian financial markets witnessed a broad sell-off of their currencies on Thursday, driven by a resurgent US dollar and a cocktail of regional economic headwinds. The Japanese yen, New Zealand dollar, and Indian rupee were among the hardest hit, reflecting both global and domestic pressures. The US Federal Reserve’s signal of a slower-than-anticipated pace of interest rate cuts in 2025 fueled the dollar’s ascent, widening the rate differential between the US and other economies, making dollar-denominated assets more attractive to investors. This, coupled with individual economic vulnerabilities in certain Asian countries, exacerbated the downward pressure on their currencies.
The Japanese yen weakened further, breaching the 155 yen per dollar mark for the first time since late November, following the Bank of Japan’s decision to maintain its key interest rate. While the decision was largely anticipated, it dampened hopes among some investors for a more aggressive tightening of monetary policy. The BOJ maintained its cautious outlook for 2025, citing concerns about sluggish economic growth despite rising inflation, a divergence from the Fed’s outlook that highlights the contrasting economic landscape between the two nations. This policy divergence further supported the dollar’s strength against the yen.
The US dollar reached a more than two-year high, buoyed by the Federal Reserve’s revised outlook on interest rate cuts. The Fed, while cutting rates as anticipated, signaled it would proceed at a considerably slower pace in 2025 than previously projected. This adjustment reflects the central bank’s concerns about persistent inflation and the resilience of the US economy. The implications of this more hawkish stance reverberated across global currency markets, with the dollar attracting investment flows away from other currencies, including those in Asia.
The New Zealand dollar plummeted to a two-year low after the country officially entered a recession. The confirmation of a technical recession, marked by two consecutive quarters of economic contraction, has heightened expectations for further interest rate cuts by the Reserve Bank of New Zealand. The weaker-than-expected GDP data, showing a 1.5% year-on-year contraction in the September quarter, further solidified the negative sentiment surrounding the New Zealand dollar, making it particularly vulnerable to the strengthening US dollar.
Across the Asian region, currencies grappled with the implications of the Fed’s hawkish signals and domestic economic challenges. The Indian rupee continued its slide, hitting a fresh record low against the dollar. The Australian dollar, although recovering slightly, remained near a multi-year low. The Chinese yuan also weakened, pressured by the prospect of further monetary easing by the Chinese government in an effort to stimulate economic growth. This potential loosening of monetary policy further contributed to the appeal of the US dollar.
The prevailing market sentiment suggests a continued period of strength for the US dollar against Asian currencies. The Fed’s slower-than-expected pace of rate cuts creates a widening interest rate differential that favors the dollar. Coupled with economic vulnerabilities and policy uncertainties in several Asian economies, the outlook for regional currencies remains challenging in the short to medium term. The divergence in monetary policy between the US and many Asian countries is likely to persist, exacerbating the pressure on these currencies. This dynamic underscores the intertwined nature of global financial markets and the significant influence of US monetary policy on global currency valuations.
