Asian currencies slipped against the dollar on Thursday as hawkish Federal Reserve minutes reinforced expectations for more rate hikes, heightening concerns about the widening interest rate spread between the United States and emerging markets. South Korea's won led declines and the yuan weakened to levels last seen in January 2017.
The minutes from the Fed's September 25-26 meeting showed every Fed policymaker backed raising interest rates and also generally agreed borrowing costs were set to rise further, despite US President Donald Trump's view that the tightening have already gone too far. Emerging economies have been playing catch-up with rising US interest rates this year, deferring investments and slowing growth as dollar-denominated debts become harder to pay.
"If this situation of rising long-end Treasury yields and a firmer dollar persists, emerging markets could find it hard to bear," Mizuho Bank said in a note. The South Korean won was the biggest loser in the region, falling 0.59 percent at 1,133.20 against the dollar.
The Chinese yuan was off 0.19 percent at 6.936 against the dollar, its weakest in nearly two years. The People's Bank of China (PBOC) set Thursday's official midpoint fix at 6.9275, its weakest since January 2017. A steep overnight drop in global oil prices cushioned the fall of the Indonesian rupiah, which declined 0.26 percent against the dollar.
Meanwhile, the Japanese yen, largely considered a safe-haven currency, strengthened 0.12 percent. Indian financial markets were closed for a holiday. South Korea's central bank kept monetary policy steady for a seventh straight month on Thursday, but flagged concerns about mounting household debt and financial stability, suggesting it could look at a rate hike as soon as November.
However, while some saw the meeting as hawkish, the Bank of Korea's downgrade of its gross domestic product growth forecasts for this year amid trade war concerns and declining exports was of some concern. "It (central bank) is trying to balance both sides of risk as the economy has been improving but at the same time the outlook is still queasy because of trade war risk," said Sim Moh Siong, FX strategist at Bank of Singapore.
A tit-for-tat trade war has left South Korea's export sector vulnerable, with shipments declining 8.2 percent in September from a year earlier, their biggest drop in over two years. The yuan has lost over 6 percent this year, and is poised to post a fifth straight session of declines as a strong dollar and China growth concerns hurt risk appetite.
Investors awaited China gross domestic product data due on Friday for clues on the effects of the ongoing trade war on the wider economy. "If the PBOC is passive then there is a likelihood you could get a negative feedback loop in terms of market pushing the dollar stronger against Asian currencies," said Sim at Bank of Singapore.
The US government refrained from naming China or any other trading partner as a currency manipulator in the semi-annual FX report, as it leans on import tariffs to try to cut a trade deficit with China. A falling yuan will exacerbate the trade surplus China has with the US.
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