The majority of Asian currencies declined on Tuesday when the U.S. dollar was becoming stronger. The yen of Japan fell to its lowest in nine months. This occurred due to traders having increased confidence with the U.S dollar following the advances that were made to end the longest government shutdown in United States history.
The appreciation of the dollar was also due to the shrinking expectations that the Federal Reserve will lower the interest rates in December. In the case when the rate decreases are less probable, the investors will want to keep the dollars because they are the best paid.
U.S. Government Shutdown Nears an End
The bill passed by the U.S. Senate towards the end of Tuesday to reopen the government and to terminate the 41-day shutdown. It is the protracted shutdown that the country has ever experienced.
The bill goes to the House of Representatives where it is likely to go through within a short time. It will then move on to the President Donald Trump who is most likely to sign it into law.
As soon as the shutdown is officially over, the U.S. government offices will open, and the official economic data will be published once again. This information has taken weeks before the investors know the true status of the U.S. economy.
This was a positive news to the investors and this saw the dollar strength increase in the global markets.
Asian Currencies Fall as Dollar Strength Rises
Most of the Asian currencies weakened as the dollar strengthened. The traders resorted to using the dollar as it is said to be safer and more stable especially in situations where there are global domes.
Japanese yen suffered the most as it fell to its lowest point in nine months. This decline occurred due to the fact that the Bank of Japan of Japan has kept the interest rates very low and this makes the yen less appealing to investors.
Meanwhile, the government of Japan intends to spend more, and this may lead to growth in national debt. These contribute towards the fact that the yen is weak against the dollar.
Chinese yuan depreciated because traders were waiting to have new information about China:
- The weakened South Korean won was as a result of a lack of investor confidence.
- The Indian rupee and Singapore dollar fell as well.
- All these falls were occasioned by the strong dollar that was driven as investors opted to store their money on the American assets.
All these declines were caused by rising dollar strength, as investors preferred to move their money into U.S. assets.
Rate Cut Hopes Fade
Some of the traders thought that the Federal Reserve (Fed) could reduce interest rates in December to boost the economy earlier this month. However, those hopes have been eroded following some indications of an economic boom in the recent past.
The dollar has also become appealing to international investors as the Fed is now predicted to maintain the rates at the same point. When the interest rates are high in the U.S., the dollar will usually be strong since the investors have higher returns on the dollar-based assets.
This is the other cause of dollar strength increase and fall in Asian currencies.
Market Waiting for New U.S. Data
Due to the shutdown, the key U.S. data including reports on jobs, inflation, and retail sales have been postponed. These reports await the investors, once the government is reinstated.
The dollar may remain strong, in case the data depicts a robust economic growth. However, in case of weak information, the Federal Reserve can consider lowering the rates once more, which will lead to a weakened dollar a little.
Until such information is published, the traders will remain on guard, ensuring that the demand of the dollar remains high.
Yen Under Pressure
The fact that Japanese yen fell to a nine month it highlights the weak position of the currency. Investors usually purchase the yen when uncertainty prevails as it is considered as a safe-haven currency.
But this time it is different. As the U.S. economy is beginning to stabilize and the government is almost reopening, the traders are shifting back to the dollar.
Another factor that has contributed to the weakness of the yen is caused by the decision of the bank of Japan to maintain interests at such low rates. The dollar is more desirable by the investors compared to the yen thus maintaining a high level of dollar strength.
What Comes Next
These are the days of importance. When the U.S. House passes the bill funding and the government is reopened, the official reports will be released soon. These will make traders know the actual picture of the economy.
The dollar strength will be maintained in case the reports indicate that the economy remains strong. However, in case there are indications of deceleration, the dollar will lose some strength, and Asian currencies may regain some strength.
In the meantime, analysts are forecasting that the U.S. dollar will remain robust because traders are of the opinion that Fed will not reduce its rates in the near future.
Summary
- U.S. dollar was boosted following development of termination of the 41 day government shutdown.
- The Japanese yen recorded a nine-month low which is a manifestation of the dollar strength.
- Traders are now of the opinion that a reduction in rate in December will be unlikely.
- Investors still prefer to use the U.S. dollar as a safe-haven instrument.
- The Asian currencies can remain weak until additional economic information is released.
