The Indonesian rupiah and the Indian rupee led gains among Asian currencies on Wednesday, as oil prices plunged overnight and the dollar languished near one-week lows. The rupiah strengthened as much as nearly 1.1 percent in early trade but trimmed some gains by 0440 GMT, while the rupee firmed about half a percent against the greenback.
Oil prices slumped more than 5 percent on Tuesday on fears of a supply glut amidst slackening demand, extending a sell-off that has taken major crude benchmarks down more than 30 percent from an October peak. India and Indonesia are net oil importing countries. "The rupee benefits from lower oil prices since lower oil prices will ease India's inflationary pressure and also eliminate market fears about the nation's current account deficit," said Gao Qi, FX Strategist (EM Asia) at Scotiabank.
The rupiah's improved performance is also expected to give Indonesia's central bank more leeway to keep interest rates unchanged at its policy meeting on Thursday.
The rupiah fell to 20-year lows against the dollar this year on a widening current account deficit before it rebounded sharply in November due to foreign inflows.
Elsewhere in the region, the Korean won and the Taiwan dollar gained 0.4 percent and 0.2 percent, respectively.
The US dollar weakened on rising anticipation the Federal Reserve will strike a dovish tone at its policy meeting later in the day, against the backdrop of slowing global growth.
A Reuters poll also showed a significant shift in expectations toward fewer Fed interest rate rises next year as risks of a US recession in the next two years jumped.
"Emerging market currencies' appreciation may continue if the Fed does deliver a dovish sentiment," said Gao.
Meanwhile, the region was also buoyed by some signs of easing in US-China tensions after US Treasury Secretary Steven Mnuchin told Bloomberg that the two countries are planning to hold meetings in January to "document an agreement" on trade.
The Chinese yuan and the Singapore dollar were marginally stronger against the greenback.
The Thai baht strengthened 0.2 as investors await the central bank's interest rate decision due later in the day.
Bank of Thailand (BOT) is expected to raise its key rate by 25 basis points from near-record lows for the first time since 2011, according to economists polled by Reuters.
Mizuho Bank said in a note: "Given that both growth and inflation continue to evolve around projection, this reduces the need for an excessive loose monetary policy on the back of slightly expansionary fiscal policy ahead of the general election."
BOT Governor Veerathai Santiprabhob said last month the policy rate would still be low, even if there is policy tightening, which will be data-dependent. Thailand's general election, the first since a May 2014 military coup, is scheduled for February 24.