Dollar boost from Fed to weigh on Asian currencies, analysts say

The Federal Reserve’s decision to cut interest rates by just a quarter point will help support the dollar and weigh on currencies across Asia, analysts say.

The dollar strength after the central bank’s announcement was broad based and Asian currencies are unlikely to escape the impact, according to Wells Fargo Securities LLC. The dollar could extend gains to 147 yen although long-term pessimism about the US currency may limit its upside, Sumitomo Mitsui Trust Bank Ltd. says.

Here is a selection of comments from analysts:

Wells Fargo Securities LLC (Brendan McKenna, emerging market strategist in New York)
“The dollar strength that materialized post-FOMC was broad based and it’s tough to imagine Asia FX being excluded from that dollar rally, barring some new messaging from the Fed, which is unlikely. The Fed, and more so Powell in the presser, was a bit non-committal to additional cuts. ‘Risk management cut’ in particular I interpreted as somewhat hawkish and Asia FX may respond to that.”

“Some of the higher beta pairs might be most sensitive. So in that sense, the Korean won and Indonesian rupiah, and maybe to a lesser degree the Philippine peso. Given the latest direction of policy mix in Indonesia, the rupiah may be the most sensitive.

Sumitomo Mitsui Trust Bank Ltd. (Takeru Yamamoto, a trader in New York)
The dollar was sold immediately after the announcement because the FOMC had been expecting to make two more interest-rate cuts within the year, but “the dollar was bought back because only one cut is expected next year and Fed Chairman Powell’s press conference was perceived as somewhat hawkish.”

Although the dollar could rise to the 147 yen level following the current trend, “the outlook for future rate cuts is weighing on the market, and pessimism about the dollar remains strong, limiting upside potential.”

AT Global Markets (Nick Twidale, chief market analyst in Sydney)
“The Fed has largely gone in line with market expectations. So I think we will see a bit of follow-on from the US session today in Asia and really the response has been underwhelming, so we could be looking for some corrections in markets in the coming days.”

“Some investors were hoping that we were going to get a more dovish Fed that could open the way to further topside moves and we’ve just been given what the market already has priced in. I think we will need another catalyst to push for new highs and we haven’t got that from the Fed, so we could see some profit taking, especially in tech sector.

TD Securities Inc. (strategists including Jayati Bharadwaj in New York)
“We remain bearish the US dollar and see any technical US dollar bounces as good opportunities to sell. The rest of the world’s growth is holding up and seems to be in a better shape compared to the US. Combined with Fed easing, this can make for an active risk-on environment fueling gains in both risk and rate sensitive currencies, which are cheap — like the Japanese yen and Australian dollar.”

VanEck Associates Corp. (Anna Wu, cross-asset strategist in Sydney)
“This is arguably the most priced-in rate cut. It was proposed in the dot plot since June. However, it does mean that US equities have another reason to continue the climb. I think the impact on Japanese markets and the BOJ is rather limited now as it had been largely priced in. The main character this week in my head is the US-China trade talk on Friday.”

ANZ Group Holdings Ltd. (strategists including David Croy in Wellington)
“The New Zealand yield curve is likely to shift higher and steeper following moves in US Treasuries, but where we end up will depend on GDP data. Our sense is that markets expect a weak number, and it’s possible we see a bigger reaction to better data than softer data.” — Bloomberg