Asian currencies firmed against the dollar on Thursday, tracking gains in the euro ahead of the European Central Bank's decision at which it is expected to shift away from its accommodative monetary policy. With the euro zone's economic recovery now into its fifth year, the ECB is widely expected to cut back on bond-buying stimulus, gearing up to raise interest rates, along with other major central banks of developed economies.
"The ECB's quantitative easing recalibration today could provide a boost to the euro-dollar and in turn enable the dollar-Asia to correct significantly lower," said Sim Moh Siong, FX strategist at Bank of Singapore. Since inflation remains low, however, any reduction in the monthly amount of asset purchases is expected to come with a lengthy extension of the programme.
The euro inched up as much as 0.2 percent to $1.183, while dollar index against a basket of six currencies was down 0.15 percent at 93.565, its lowest in six days. The greenback, which lost steam having rallied over the past week on optimism over the prospects for US tax reforms and speculation over next Federal Reserve chair, was weighed by a slight pull-back in US Treasury yields.
After rising significantly in the early US session, treasury yields have come off quite a fair bit, which took off some pressure from dollar against Asian currencies as a whole, added Siong. In Asian currencies, the South Korean won was the best performer, strengthening as much as 0.35 percent to its strongest level since September 1.
The won took support from South Korean third quarter gross domestic product, which grew at its fastest pace in seven years on global demand for the country's electronics, reinforcing the case for higher interest rates. The Taiwan dollar was up 0.17 percent, while the Japanese yen firmed 0.2 percent against the dollar.
The Singapore dollar gained slightly as data showed the city-state's industrial production in September beat expectations and grew for the fourteenth consecutive month thanks to continued growth in electronics. China's yuan was 0.16 percent higher on the day, in line with a strengthening official midpoint.
The Thai baht did not trade as markets were closed for a public holiday. The Indian rupee strengthened for a second straight session, up as much as 0.25 percent, in line with the broader improvement in risk appetite. The Indian government said on Tuesday it approved a $32.43 billion plan to recapitalise its state banks over the next two years.
With the plan, Prime Minister Narendra Modi is bidding to tackle a major drag on the economy that has frustrated his attempts to boost growth. "The markets are expecting that to be helpful in terms of bolstering, lending, given that Indian state banks have been constrained by capital adequacy in the past," said Siong.