Asian currencies retreat as talk of Fed rate hike returns

[SINGAPORE] The dollar was dominant in Asia Tuesday as Fed officials talked up expectations for an increase in interest rates within the year after deciding against a raise last week.

Regional currencies were on the retreat amid concerns that an interest rate hike would spark an outflow of capital from emerging markets to seek higher returns.

A decision last week by the Federal Open Market Committee (FOMC) of the US central bank to hold off a much anticipated rate increase this month was widely welcomed in the region and weakened the greenback.

But comments since the weekend by Fed officials that an increase is likely to push through within the last few months of the year injected fresh vigour into the dollar.

"Fed rate hike bets are creeping back after Atlanta Fed president (Dennis) Lockhart, a known hawk and FOMC voter, reiterated his views of a rate hike this year," said Bernard Aw, market strategist at IG Markets in Singapore.

He told AFP this "reinforced" the remarks made at the weekend by his colleagues James Bullard and John Williams of a rate increase this year.

"The dollar gained against major currency pairs during the overnight session, moving back to pre-FOMC levels," Mr Aw said.

"Investors are cautiously taking on some risk, where we have seen US equities advancing while US treasuries were sold." The Fed has two meetings left this year, one in October and the other in December. Markets are looking at either of those meetings for a decision on whether to lift rates for the first time in more than nine years.

Japanese financial markets are closed until Wednesday for public holidays.

Against key Asian currencies, the dollar rose 0.16 per cent against the Singapore dollar, 0.29 per cent against the Taiwan dollar, 0.13 per cent against the South Korean won and 0.11 per cent against the Philippine peso in late-morning trade.

The greenback was also stronger against the Indonesian rupiah, Indian rupee, Malaysian ringgit and Thai baht.

It gained against the New Zealand dollar but was weaker when compared to the Australian dollar.

The yen was stronger against both the dollar and the euro as the Japanese currency is considered a safe haven amid uncertainty, while the euro gained against the dollar.

The dollar also rose against the Chinese yuan as President Xi Jinping kicks off a visit to the United States on Tuesday.

"The Chinese yuan is expected to remain stable around 6.37 during President Xi Jinping's visit to the US," DBS Bank said in a market commentary.

"Last month's stock market volatility have raised doubts over the health of the Chinese economy and whether China is returning to a weak exchange rate," it said.

"These are the issues that President Xi will need to address during his visit to reassure the global financial markets."

AFP