Dollar Strength Pressures Asian Currencies

The dollar has gained this week as markets fully price in a December Fed move, with some investors seeing scope for a 50-basis-point hike. The DXY index reached levels last seen around the shock announcement of U.S. tariffs on “Liberation Day.”

Asian currencies have given back gains made as oil prices pulled back. The U.S.-Iran war’s oil shock has weighed on the region, where many economies rely on energy imports. A firmer dollar, higher U.S. yields and elevated oil prices create a difficult near-term backdrop, said Lloyd Chan, senior analyst at MUFG.

The yen was trading at 159.73 to the dollar, near the 160-163 range that Chan described as historically sensitive to potential intervention. Though investors also expect Bank of Japan rate hikes, a more aggressive Fed could keep the U.S.-Japan rate gap wide enough to support carry trades, in which investors borrow in lower-yielding currencies to buy higher-yielding assets.

The Australian dollar fell to its weakest level against the greenback since March, trading at 68.41 U.S. cents, below the 70-cent level seen as key support. Bets on Fed tightening are compounded by changing expectations for Reserve Bank of Australia policy. Markets are considering RBA rate cuts from June onward, said Sean Callow, senior currency strategist at ITC Markets.

Southeast Asian currencies broadly weakened amid risk aversion linked to jitters in technology stocks after Nvidia shares slumped. Indonesia’s rupiah touched another record low against the dollar. Domestic political uncertainty has left it especially fragile and least able to absorb dollar strength, said iFast research analyst Kok Jun Yong.

South Korea’s won and India’s rupee have fared better. The won has retained gains as its pace of appreciation moderates, with a relatively supportive macroeconomic backdrop, Chan said. OCBC strategists Sim Moh Siong and Christopher Wong linked the rupee’s resilience to renewed foreign portfolio inflows. Further support could come if upcoming Indian inflation data strengthens expectations of more Reserve Bank of India tightening, Chan said.