Asian currencies face tough time against US dollar after Fed forecasts

Outlook for higher-for-longer rates pushes US dollar up against almost all currencies

- Ovais Subhani

Asian currencies, including the Singapore dollar, will have a tough time fighting the strength of the US dollar after the Federal Reserve raised its inflation and interest rate forecasts.

The US central bank on Dec 18 delivered its highly anticipated third and final rate cut for 2024 and shocked global markets in the process.

Its accompanying report showed that a majority of Fed policymakers now believe core inflation in the US will come in at 2.5 per cent in 2025, up from an earlier estimate of 2.2 per cent, and there will only be two rate cuts in 2025, down from the four predicted in September.

US investors responded by selling stocks and bonds, with Asian markets taking the cue and staging a similar sell-off on Dec 19.

The outlook for higher-for-longer US rates, not surprisingly, pushed the US dollar up against almost all currencies.

Buying a currency backed by higher interest rates while simultaneously selling a low-yielding one is called a carry trade - the most popular trading strategy in foreign exchange markets.

The US stock benchmark S&P 500 suffered its biggest loss since 2001 for a Fed decision day, falling by about 3 per cent on Dec 18.

Singapore's Straits Times Index closed 0.4 per cent down, Hong Kong's Hang Seng was off 0.6 per cent, while Japan's Nikkei fell 0.7 per cent.