Most Asian currencies, stocks lose ground as rate-cut rally fades

Updated at 0658 GMT

By John Biju

Jan 3 (Reuters) –Most Asian currencies and equities lost ground in a broad sell-off on Wednesday, as investors stayed cautious on riskier Asian assets amid fading optimism about early U.S. interest rate cuts ahead of the Federal Reserve’s December meeting minutes.

MSCI’s emerging market currency index .MIEM00000CUS, which posted its steepest one-day drop since February 2023 on Tuesday, was down 0.2%. The South Korean won KRW=KFTC slid 0.3%, while the Malaysian ringgit MYR= retreated 0.6% and was headed for its worst day since early November.

Asian currencies and stocks rallied towards the end of 2023, after an unexpected dovish tilt by the Fed fuelled bets that the tightening cycle was over and markets started to anticipate rate cuts would be delivered as early as March.

“I think the market is probably turning a bit more cautious over the Fed rate cut pricing, given that some of this could have been overdone,” said Moh Siong Sim, a FX strategist at Bank of Singapore.

As rate-cut pricing looks overdone and markets reassess the situation, this might support the U.S. dollar and work against Asian currencies, he said.

The U.S. dollar =USD hovered near a two-week high against its major peers on Wednesday, while U.S. Treasury yields US10YT=RR hit two-week high overnight.

Stock markets in Asia fell, with South Korea .KS11 shedding more than 2% after hitting a 19-month high on Tuesday. Taiwanese stocks .TWII slid 1.7%, while equities in Singapore .STI retreated 0.8% and were set for their worst session since early November.

Markets are now awaiting the minutes of the Fed’s latest policy meeting due later in the day for further clues on rate cuts this year. They are also keenly awaiting a slew of U.S. economic data this week, including job openings and non-farm payrolls.

Inflation data from Thailand due on Thursday and from the Philippines on Friday are also on investors’ radar. Recent data has shown an easing trend in inflation in Asian countries, with annual inflation in Indonesia cooling more than expected in December.

The Indonesian rupiah IDR= was largely unchanged, while equities .JKSE were down 0.4%.

Although inflation has been cooling in most Asian countries, most Asian central banks are still on the restrictive side of monetary policy setting, with the Bangko Sentral ng Pilipinas saying last month that policy would have to stay “sufficiently tight” to bring inflation back to target.

“Asian central banks are likely not in a rush to cut rates and won’t be ahead of the Fed in cutting,” said Alex Loo, a macro strategist at TD Securities.

However, he said they suspect there is a gradual shift in tone after the Fed’s pivot in December, with Asian central banks such as the Bank of Korea dialling back their hawkish tone.

HIGHLIGHTS:

** India’s 10-year benchmark yields IN10YT=RR fall 0.6 basis point to 7.20%

** Thai PM proposes $102 bln budget to parliament

** Indonesia president proposes $904 mln increase in fertiliser subsidies

Reporting by John Biju in Bengaluru; Editing by Christian Schmollinger and Subhranshu Sahu