Asian FX Weaken As Fed Rate Hike Looms, Philippine Peso Hits Record Low

The Philippine peso hit a record low against the dollar on Wednesday, as most other Asian currencies fell ahead of a U.S. Federal Reserve interest rate decision that would set the pace of financial markets for months.

China’s yuan CNY=CFXS weakened to a 26-month low, as investors braced for an expected hefty interest rate hike from the Fed.

Asian stocks also lost ground, with Manila’s benchmark index. PSI dropping more than 2% to lead losses among regional peers, while shares in Kuala Lumpur’s KLSE and Mumbai’s NSEI declined 0.8% each and Jakarta equities. JKSE fell 0.9% to a three-week low.

The U.S. central bank is set to announce its rate decision later in the day, with rate futures traders pricing in an 81% chance of a 75-basis point hike and a 19% probability of a 100-bps tightening.

The dollar hovered near a two-decade peak against a basket of currencies, after yields on U.S. Treasury notes, a rough gauge of rate expectations, leaped ahead of the Fed decision.

Rising yields strengthen the dollar, increasing the appeal of Treasury notes and the greenback, in turn weighing on riskier Asian assets.

Investors in Asia also await policy decisions from central banks in Indonesia, Taiwan, the Philippines and Japan this week.

While the central banks in Indonesia, Taiwan and the Philippines are likely to raise rates, the Bank of Japan is expected to stick to its dovish monetary policy despite the yen’s steep decline.

The peso PHP= declined 0.8%, while the Taiwanese dollar TWD=TP and Indonesian rupiah IDR= lost 0.3% and 0.2%, respectively. The Japanese yen JPY=, which has fallen nearly 3.4% so far this month, was trading flat.

“Foreign investors in the Philippine equity markets have been selling off their holdings, and these heavy outflows have been the main contributor to the peso’s exasperated weakness recently,” Alvin Tan, head of Asia FX strategy at RBC Capital Markets told Reuters.

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