Asian currencies gain as Fed rate hike bets ease

Emerging Asian currencies strengthened on Friday amid broad dollar weakness, while benchmark bond yields in several countries fell on hopes that the U.S. Federal Reserve might slow or even pause its tightening cycle later in the year.

South Korea's won (KRW=KFTC) firmed 0.8% to its highest level since April 26, while the Indonesian rupiah (USDIDR), Taiwanese dollar (TWD=TP) and Malaysian ringgit (USDMYR) were up between 0.4% and 0.5%.

However, many thought big, early hikes would allow room to pause later in the year to assess the effects of that policy tightening.

"Its (DXY) downside bias should prevail if risk appetite holds up on the belief that markets have fully discounted this year's Fed hikes," Philip Wee, a senior FX strategist at DBS, wrote in a note.

The yield on Indonesia's benchmark 10-year notes (ID10YT=RR) fell to 7.118%, its lowest since May 9, while the yield on Malaysia's 10-year note (USDMYR) wallowed at its lowest since mid-April.

U.S. benchmark treasury yields (IS10YT=RR) had hit a three-year high of 3.203% earlier this month on fears that rapid hikes from the Fed could tip the economy into recession.

Stocks in Asia were on track to close the week on a strong note, buoyed by an overnight relief rally on Wall Street, with investors taking comfort from strong results for regional technology firms and U.S. retailers.

Stocks in Taipei (.TWII) jumped 1.7%, set for its best session since mid-April, while shares in Jakarta (COMPOSITE) gained as much as 1.9% to hit its highest since May 9.

The yuan (CNY=CFXS), which has underperformed among Asia currencies this week, was flat, as investor concerns over China's prolonged economic slowdown lingered.

"There is growing pessimism about China... and hopes for a rebound hinge on a reopening of the economy from severe COVID restrictions," said Alvin Tan, Head of Asia FX Strategy at RBC Capital Markets.

"The fog of uncertainty is very thick," he added.

The won led gains among regional currencies, a day after the country's central bank delivered back-to-back interest rate hikes and forecast further aggressive increases to wrestle consumer inflation down from 13-year highs.

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