By Ambar Warrick
Investing.com-- Asian currencies sank on Thursday after the Federal Reserve projected a more hawkish stance than markets were expecting, while concerns over rising COVID-19 cases in China and worsening economic conditions also weighed.
The Federal Reserve hiked interest rates by a relatively smaller 50 basis points (bps) on Wednesday and said that it will raise rates at a more moderate pace in the coming months.
But Fed Chair Jerome Powell warned that borrowing costs are likely to peak at higher-than-expected levels, given that inflation is still running well above the central bank’s target range.
Analysts said that the Fed needs inflation to retreat further before it can taper its hawkish stance, and is likely to keep raising rates till then.
Such a scenario bodes poorly for Asian currencies, given that they fell sharply this year as the gap between risky and low-risk debt narrowed.
Concerns over slowing economic growth in China also weighed on regional sentiment. The Chinese yuan shed 0.1% after data showed both industrial production and retail sales sank below expectations in November due to COVID-related disruptions.
While the country has now begun relaxing several COVID-related curbs, it is facing an unprecedented spike in infections, so much so that the government said it was now impossible to track the spread of the virus in the country. Analysts warned that rising infections will likely spur some near-term volatility in local markets.
The dollar index and dollar futures steadied from recent losses on Thursday, but remained under pressure from uncertainty over U.S. monetary policy. The Fed’s warning on higher rates comes even as inflation eased more than expected in the past two months.
Even so, early data shows that a majority of market participants are expecting a smaller 25 bps hike by the Fed in February. Smaller rate hikes are likely to spur more pressure on the dollar, which has already fallen in recent weeks amid growing signs that U.S. inflation has peaked this year.
Focus on Thursday is also on interest rate decisions by the Bank of England and the European Central Bank. Both banks are expected to hike rates by 50 basis points, as they move to contain record-high increases in inflation this year.