Asia currencies at seven-month high amid US 'Goldilocks' scenario

Asian currencies rallied to the highest in seven months as ebbing US recession concern, bets on Federal Reserve rate cuts next month and an improving domestic backdrop lifted sentiment in the region.

The Bloomberg Asia Dollar Index gained as much as 0.6% on Monday to the highest since January. The South Korean won and the Malaysian ringgit led the regional advance on upbeat growth prospects and the Thai baht rose on easing political tensions.

“It feels like a Goldilocks scenario, where US recession fears fade while growth momentum in the region remains moderate,” said Christopher Wong, a foreign-exchange strategist at Oversea-Chinese Banking Corp. “There is room for Asia ex-Japan currencies to recover against a backdrop of developed-market central banks largely on an easing bias.”

The ringgit rose as much as 1.5% to 4.3678 per dollar, the strongest since February 2023. On Friday, the nation reported a stronger-than-expected increase in second-quarter gross domestic product from the previous year, while global funds poured the most cash into its stock market since June.

The baht extended gains to 34.409 per dollar, the highest since January, after Paetongtarn Shinawatra on Friday won enough votes in parliament to become the next Thai prime minister.

While her appointment helped to quell concern of a protracted political vacuum after her predecessor was ousted by a Constitutional Court, the currency could face a bumpier path ahead amid reports that the new government may scrap a $14 billion digital cash handout program. The relationship between the new government and the Bank of Thailand will also be in focus again due to the new premier’s previous criticism of the central bank.

Goldman Sachs Group Inc. economists on the weekend lowered the probability of a US recession in the next year to 20% from 25%, citing last week’s better-than-expected US retail sales and jobless claims data. They also said they were “more confident” the Fed will cut interest rates by 25 basis points at their September policy meeting. 

Easing concern of a recession in the world’s biggest economy is a positive for Asia’s export oriented nations. The South Korean won rallied 1.5% to 1,331.35, the highest since March. The Philippine peso rallied 1% to 56.66 per dollar, its biggest gain since November.

The yen advanced as much as 1.2% to 145.87 per dollar as traders waited to see if Bank of Japan Governor Kazuo Ueda would provide hints on the central bank’s rate-hike path in his appearance in front of the parliament on Aug. 23. 

The Bloomberg Dollar Spot Index slipped 0.3% as traders waited for Fed Chair Jerome Powell’s speech at Jackson Hole symposium later this week for clues on rate cuts. A gauge of aggregate demand for bullish call options over bearish puts on the US currency showed traders were split on what direction to hedge against, having paid up for bets on a stronger dollar for much of the year.

Regional equities also climbed on Monday, with the benchmark MSCI Asia Pacific Index rising almost 1% to head for its highest close in a month.

“The market is envisaging a brighter picture for Asian economies in the coming quarters,” said Tomo Kinoshita, global market strategist at Invesco Asset Management Japan. He expects investors to allocate more funds to Asian equities, especially to those in India, Indonesia and Malaysia.