April 22 (Reuters) –The receding prospect of U.S.interest rate cuts this year has sent Asian currencies reeling as the dollar holds court due to a robust U.S. economy and sticky inflation.
The Japanese yen hit a 34-year low last weekwhile the Indian rupee toucheda record low despite expectations of strong domestic growth.The Indonesian rupiah reachedits weakest level since April 2020, prompting strong intervention from Bank Indonesia.
The booming U.S. economy has caught many traders and fund managers by surprise as markets started the year confidentthe Federal Reserve would cut rates by as much as six times in 2024.
However, persistently buoyant U.S. data, lead by higher-than-expected inflation has sent the dollar index =USDsome 5% higher year-to-date.The USDhas consolidated after reaching a 106.51 high last week. The focus isnow on the 107.34 October 2023 high – a break risks areturn to 110.
The Fed will probably only cut interestrates once or twice this year, or perhapsnot at all. Fed Chair Jerome Powell said the central bank needed more time to gain confidence inflation was under control before it starts cutting.
Asian currencies will thereforeremain under pressure, with little central banks can do to fend off the strong USD. Verbal intervention is‘cheap’, and will not have enough firepower to change the dollar’s course.The chance of a joint central bank intervention ishighly unlikely under current scenarios, as it’s not a global crisis but merely a case of a booming U.S.economy.
Former U.S. Treasury Secretary John Connally’s 1971 comment still holds true: “the dollaris our currency, but it’s your problem’
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Catherine Tan is a Reuters market analyst. The views expressed are her own. Editing by Sonali Desai
