Most Asian currencies firmed on Thursday ahead of major policy decisions from regional central banks, helped by the dollar pulling back from earlier gains as US debt yields declined after the Federal Reserve hiked rates. It was the Fed's third interest rate hike this year. It foresees another rise in December, three more next year, and one increase in 2020.
The Fed also dropped a reference in its statement to the word "accommodative", although Fed Chairman Jerome Powell later said policy was still accommodative. The Fed has gradually raised rates since late 2015 from a near-zero level. Long-term US Treasury yields declined following the Fed's tightening, pulling back from four-month highs of 3.11 percent scaled earlier in week, with the dollar index against a basket of six major currencies at 94.423.
The Fed's decision came hours before policy meetings at the Philippine and Indonesian central banks, at which interest rate hikes to support their faltering currencies are seen as all but certain. Markets have been expecting Bank Indonesia (BI) to raise rates by 25 basis points, but Khoon Goh, Head of Asia Research for ANZ, expects Bank Indonesia to be more aggressive and hike rates by 50 basis points.
The Philippine central bank is widely expected to hike by 50 basis points. The Indonesian rupiah, the region's second-worst performer, was flat as previous attempts to stem the currency's decline have all but failed. "Given BI's intention to retain its hawkish monetary policy stance, we expect BI to tighten more in order to steer the exchange rate towards its target range of 14,300-14,700 (rupiah per dollar) for 2019," Mizuho Bank said in a note.
The Philippine peso traded cautiously ahead of what will likely be Bangko Sentral ng Pilipinas's fourth rate hike this year. Goh said that with the Fed expected to continue raising rates, emerging Asia countries would probably have to follow suit, especially so for countries with current account deficits coming under additional pressure from rising oil prices.
The volatile rupee has fallen about 12 percent against the dollar this year, prompting the government to raise import tariffs on "non-essential items", in an attempt to reduce the widening current account deficit and support the currency. After initial strength, the rupee pulled back to waver between positive and negative territory, at 72.640 per dollar.
India has also been grappling with fears of contagion as liquidity concerns mount. A rupee trader said liquidity measures from the central bank on Thursday should give some relief to the banking system. This puts the government and central bank in a dilemma as they struggle to calm liquidity fears while also supporting the faltering rupee. The Reserve Bank of India will hold a policy meeting on October 5.
The South Korean won, coming off a three-day public holiday, strengthened 0.4 percent to 1110.9 versus the dollar, even as its central bank chief expressed concern over the Sino-U.S trade conflict and said tepid inflation and a weak job market were obstacles to tightening monetary policy. The Taiwan dollar mirrored its South Korean peer, gaining 0.4 percent to 30.579 per dollar, on the day the central bank is seen likely to leave its policy rate steady.
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