Asia FX subdued, dollar weakens after bond rally; rupee set for 2% weekly jump

Asian currencies remained relatively stable on Friday following a retreat in the U.S. dollar from an 18-month peak, as U.S. Treasuries rallied. The Indian rupee is expected to experience significant weekly gains following actions by the Reserve Bank of India to reduce demand for the dollar. Most Asian currencies are expected to have a subdued weekly performance, while the dollar is anticipated to decline for the first time in five weeks.

The U.S. Dollar Index fell slightly by 0.1% to 101.982, indicating a potential 0.2% decline for the week. The decline in the dollar's appeal was due to rising U.S. inflation data and a decrease in U.S. Treasury yields, spurring investors to seek the safety of government bonds amid uncertainties surrounding AI investments and debt financing.

The 10-year yield dropped to around 5.09%, the lowest since September 23. The Japanese yen's value against the U.S. dollar saw little change, with a 0.3% weekly loss. The Chinese yuan's onshore and offshore values against the U.S. dollar remained largely unchanged. The South Korean won's value against the U.S. dollar rose by 0.1%, signaling a 0.2% weekly increase after substantial fluctuations earlier in the week.

The movements of currencies remain sensitive to fluctuations in U.S. yields and anticipated Fed policy decisions. Investors are also monitoring remarks from Fed Chair Kevin Warsh at an International Monetary Fund gathering in Bangkok. Currently, there is a 28% likelihood of a rate increase this month, with a 66% probability of a December hike, as per CME FedWatch.

The Indian rupee emerged as the standout performer in the region, with the USD/INR pair falling by 0.2% to below 95 rupees and poised for a 1.9% weekly increase after nearing record lows near 97 rupees last week. The Reserve Bank of India implemented measures to deter speculative dollar demand, such as stricter regulations for certain foreign-exchange derivative transactions and a dedicated window for state-run oil companies to buy dollars directly from the RBI.

Nevertheless, these measures have disrupted liquidity in the rupee forward market, causing higher hedging costs and uncertainty over transaction rules, as reported. The RBI subsequently provided clarification on the new requirements. The Australian dollar's AUD/USD pair rose by 0.3%, but was set for a 0.6% weekly decline. The Singapore dollar's USD/SGD pair maintained a flat position and was expected to have a minor week.