Asia FX struggles amid rising US dollar and Treasury yields

© Reuters

Investing.com - Asian currencies faced continued selling pressure on Tuesday as the US Dollar dominated, bolstered by resilient U.S. data and the Federal Reserve's stance on maintaining higher interest rates for an extended period. The dollar index has reached its highest level since November 2022, standing at 107.14, with the next target being 108.0, just ahead of the 108.98 61.8% Fibonacci retracement.

The sell-off in U.S. Treasuries regained momentum after September's month-end flows, fueled by robust ISM manufacturing data released on Monday. The benchmark 10-year yield reached 4.70%, a new high since 2007. This yield differential enhances the appeal of the dollar, further depressing Asian currencies, particularly the Chinese yuan.

Over the weekend, the World Bank issued a warning about a bleak outlook for Asia, downgrading its 2024 forecast to the lowest in half a century (excluding periods of the coronavirus pandemic, the Asian financial crisis, and the 1970s oil crisis).

China's anticipated recovery from the pandemic has been less robust than expected, and the ongoing property crisis has further dampened sentiment, leading to significant foreign outflows. The People's Bank of China appears to be running out of options to defend the yuan. Its policy stimulus measures have had limited effect so far, and further rate cuts could lead to even more outflows. The central bank is also dealing with declining retail sales, high household debt, and youth unemployment rates exceeding 20%.

A slowdown in global and Chinese demand is likely to impact Asian exports negatively, adding more pressure on regional currencies. The bullish outlook for USD/CNH, predicted to rise to 7.50 by the end of 2023, could drag other Asian currencies down. USD/SGD and USD/MYR fell 0.2% apiece, the USD/THB shed 0.5%, the USD/IDR dipped 0.4%, the USD/INR gained 0.2%, and the USD/KRW fell 0.4%.