Asia FX firms slightly as dollar retreats with Fed rate cut in sight

Investing.com-- Most Asian currencies drifted higher on Tuesday, while the dollar pulled back further amid growing conviction the Federal Reserve will cut interest rates later in the week. 

But gains in regional markets were limited by caution over just what the Fed will signal on future rate cuts, given that U.S. inflation remains sticky. Some geopolitical uncertainty stemming from Russia and Ukraine also weighed on appetite for risk-driven markets, while gold hit a record high. 

Beyond the Fed, focus this week is also on a Bank of Japan interest rate decision, although markets see little scope for any changes by the BOJ amid heightened political uncertainty in the country. 

Asia FX firms slightly, yen steady ahead of BOJ

The Japanese yen’s USD/JPY pair fell 0.1%, moving little after a long weekend. 

The Bank of Japan is set to meet this Friday, and is widely expected to leave rates unchanged around 0.5% in the face of increased political uncertainty after Japanese Prime Minister Shigeru Ishiba abruptly resigned earlier this month. 

But the BOJ still has to contend with sticky domestic inflation, which analysts say could bring a rate hike by as soon as October. August consumer inflation data is due on Friday, prior to the BOJ’s decision. 

Among other Asian currencies, the Chinese yuan’s USD/CNY pair was flat, showing little reaction to pledges of more stimulus measures from Beijing.

Chinese government officials said they will promote “15 minute convenience living circles” in major cities, a move that is likely to bring more support for private consumption. Beijing’s vow of more economic support also comes after a string of weak prints for August, which highlighted sustained pressure on the Chinese economy.

Still, the yuan remained close to its highest level since November 2024, amid strong support from Beijing in recent months. Market focus was also on ongoing trade talks between Washington and Beijing, which come amid increasing differences over semiconductor trade between the two countries. 

The South Korean won’s USD/KRW pair fell 0.3%, while the Singapore dollar’s USD/SGD pair fell 0.1%. The Australian dollar’s AUD/USD pair was flat near 10-month highs.

The Indian rupee’s USD/INR pair steadied above 88 rupees, although it did fall from record highs hit earlier in September. 

Dollar weakens with Fed rate cut on tap 

The dollar index and dollar index futures fell about 0.1% to 0.2% in Asian trade, extending mild overnight declines. 

The greenback was pressured by increasing conviction that the Fed will cut interest rates at the conclusion of a two-day meeting on Wednesday. 

Markets are pricing in a 99.7% chance for a 25 basis point cut, and a 0.3% chance for a 50 bps cut, CME Fedwatch showed. 

But focus will be squarely on the Fed’s outlook on rates, especially given that Chair Jerome Powell has remained largely non-committal towards any future easing, citing concerns over sticky inflation. 

The U.S. Senate on Monday narrowly voted in favor of U.S. President Donald Trump’s nomination to the Fed board, Stephen Miran, who will participate in the central bank’s meeting this week.

Separately, an appeals court ruled that Trump could not fire Fed governor Lisa Cook, allowing her to attend this week’s meeting.