Asian Currencies Under Pressure as US Dollar Strengthens Amid Global Uncertainties

US Dollar Dominates, Putting Asian Currencies in the Red

As 2024 winds down, the Asian currency market finds itself under increasing pressure. Most of the region's currencies have edged lower, with significant losses observed in the South Korean won, amid deepening political unrest, and some movement in other key currencies such as the Japanese yen, which has gained ground following expectations of an interest rate hike in Japan.

In the backdrop of these currency fluctuations, the U.S. Dollar Index continued its climb, maintaining its position near a two-year high, which it reached in the previous week. This continued strength of the dollar has made it more challenging for Asian currencies to maintain upward momentum, with many facing sharp declines in recent trading sessions.

The U.S. Dollar Index Futures mirrored this upward trend, indicating the persistent dominance of the dollar across global markets. As a result, many Asian currencies have been set for another week of losses, following significant declines in the previous week. The Federal Reserve's projections of fewer interest rate cuts in 2025 have only intensified the dollar's strength, placing additional downward pressure on regional currencies.

The Japanese Yen: A Brief Respite Amid Rate Hike Expectations

Amid the broader weakening of Asian currencies, the Japanese yen showed a notable divergence, appreciating slightly on Friday as markets reacted to new inflation data from Tokyo. The USD/JPY pair fell 0.3% on Friday, which came after government data revealed that consumer price index (CPI) inflation in Tokyo had exceeded expectations for December. This data reinforced expectations that Japan’s central bank, the Bank of Japan (BoJ), may soon hike interest rates to curb inflation.

Some Bank of Japan policymakers have already indicated that the economic conditions are aligning for a rate hike in the near future. The minutes from December’s policy meeting included a prediction from one BoJ member suggesting that a move to increase rates could occur soon, potentially shaking up the broader currency market.

However, the yen's brief rally may not last long. Despite the inflationary pressures, Japan’s factory output contracted at a slower pace in November than previously expected, indicating that foreign demand for Japan’s goods remains subdued. While the outlook for the yen seems temporarily buoyed by rate hike speculation, its medium-term trajectory will depend heavily on global economic conditions and the policies of the BoJ.

The Indian Rupee Hits New Lows Amid Continued Dollar Strength

The Indian rupee continued to face significant challenges, falling further against the U.S. dollar after hitting a record low in the previous trading session. On Friday, the USD/INR pair inched up by 0.2%, reaching 85.713 rupees. This marks an ongoing trend of rupee depreciation, fueled in part by the broad strength of the dollar, as well as India’s own economic challenges.

India’s currency has been particularly vulnerable to the Fed's hawkish stance, as the expectation of fewer rate cuts in 2025 continues to encourage foreign investors to favor dollar-denominated assets. At the same time, the country’s current account deficit and high oil import bills have added further downward pressure on the rupee.

Mixed Performance Across Other Asian Currencies

Meanwhile, other Asian currencies exhibited a mixed performance in Friday’s trade. The Chinese yuan remained largely muted, with the USD/CNY pair showing little movement. However, Chinese industrial profits did show signs of recovery in November, contracting at a slower pace than previously, providing a small boost to sentiment in the region. Yet, the ongoing weak domestic demand in China continues to limit the yuan’s potential for a more robust recovery.

The Singapore dollar saw a slight uptick of 0.1% against the dollar, while the Australian dollar faced a minor decline. The Philippine peso saw a 0.4% drop, continuing its recent struggles, while the Indonesian rupiah posted a modest gain of 0.4%.

South Korean Won Falls Amid Political Crisis

One of the most notable movements on Friday was the continued slide of the South Korean won. The USD/KRW pair rose by 0.7%, following a similar gain in the previous session, setting the currency on course for a nearly 2.5% loss for the week. The won’s sharp decline can be attributed to ongoing political unrest in South Korea.

The country’s acting president, Prime Minister Han Duck-soo, is facing an impeachment vote, adding fuel to the political crisis in South Korea. The unrest has been triggered by a controversial decision from the Constitutional Court regarding President Yoon Suk Yeol's short-lived martial law declaration. The impeachment push against Han has only deepened the crisis, putting the nation’s democracy in a precarious position.

This political instability has raised concerns both domestically and internationally, as allies of South Korea express their worries over the state of the country’s governance. As a result, the won’s weakness is expected to persist, with the currency remaining highly vulnerable to ongoing political turmoil.

Looking Ahead: The Dollar's Continued Domination

The overarching theme in the currency markets heading into the new year is the dominance of the U.S. dollar. As the Federal Reserve maintains its hawkish outlook, Asian currencies will continue to face significant challenges in regaining lost ground. The outlook for the U.S. economy remains relatively strong, with high inflation and robust economic performance under the incoming U.S. administration, further supporting the dollar.

For Asian economies, the challenges are compounded by domestic issues such as political instability, weak demand, and supply chain disruptions. While the Japanese yen may see brief periods of strength, largely driven by interest rate speculation, it remains at risk of being dragged down by broader market forces.

In countries like India and South Korea, where political instability and economic vulnerabilities are more pronounced, the outlook for their respective currencies remains fraught with uncertainty.

A Tough Year-End for Asian Currencies

As we approach the end of 2024, most Asian currencies are struggling under the weight of a stronger dollar and domestic challenges. The South Korean won is bearing the brunt of political unrest, while the Indian rupee is seeing continued depreciation due to broader macroeconomic pressures. The Japanese yen is showing some resilience on the back of inflation data, but its future trajectory remains uncertain amid global economic headwinds.

With the U.S. dollar maintaining its dominance, and the Federal Reserve signaling fewer rate cuts, the prospects for a major recovery in Asian currencies appear bleak in the short term. Currency traders and investors should remain cautious, as the strength of the dollar looks set to persist through 2025.