Most Asian currencies weakened against the dollar on Tuesday as caution prevailed ahead of an outcome from the US Federal Reserve's policy meeting this week. The dollar index, which tracks the greenback against a basket of six major peers, was up 0.07 per cent at 93.932.
“We have seen relatively little volatility in Asian currencies,” said Chang Wei Liang, an FX strategist with Mizuho Bank. “Markets are in a wait-and-watch mode ahead of the FOMC meeting.”
The Philippine peso was down nearly quarter of a per cent on the day, weighed down by data showing a record trade deficit of $2.85 billion in October. China's yuan slipped on rising dollar demand from corporates, while the Malaysian ringgit also declined on the day.
Thai baht, S. Korean won
The Thai baht and the South Korean won advanced against the dollar. The Bank of Thailand said on Tuesday it had intervened this year to slow the strengthening of the baht to reduce the impact on businesses. With a near 10 per cent rise, the baht is the third best-performing Asian currency against the dollar this year.
'Dot plot'
While a Fed rate hike this week is largely priced in, analysts said the focus will be more on the 2018 “dot plot". The “dot plot” is policymakers' rate projections and provides a view into their interest rate outlook. If the Fed maintains its current dot plot with three hikes for 2018, the dollar will strengthen against Asian currencies, said Mizuho's Wei Liang.
“But at the same time, it is not going to be substantial, given that we still have strong numbers coming up from Asia, such as Chinese trade data, which suggests global trade recovery is still on a firm footing.”
Direct settlement of transactions
On Monday, the central banks of Indonesia, Malaysia, and Thailand had launched a framework aimed at increasing direct settlement of transactions in their local currencies to reduce the current dependence on the US dollar. This framework should insulate the three currencies to a certain extent from dollar volatility and give them greater stability, Maybank said in a report.
Rupee edges down
The Indian rupee was down 0.2 per cent ahead of inflation data, which a Reuters poll found is expected to surge to a 13-month high in November. Indian bond yields spiked for a fourth straight session to their highest in more than 15 months on concerns of inflation breaching the central bank's medium-term target of 4 per cent in November.
“We are mindful that, unlike the past couple of years, crude oil prices are higher and adding pressure to India's inflation and current account deficit,” DBS said in a report. Some analysts believe countries with larger current account deficits will see their currencies depreciate faster against the dollar next year.