Dollar is now priced for excellence.

While the Japanese yen steadied as government officials warned of possible intervention, other Asian currencies fell Wednesday as growing expectations of a slower pace of U.S. interest rate decreases bolstered the dollar.

Following Washington’s addition of two significant Chinese enterprises to a blacklist of businesses with ties to the Chinese military, regional markets were also struggling with the deteriorating trade relations between the United States and China.

The action is taken shortly before Donald Trump, the president-elect, takes office on January 20. Trump has promised to put high trade taxes on China. Earlier this week, the USD/CNY exchange rate steadied after hitting its lowest level in 17 years.

The South Korean won’s USD/KRW exchange rate increased by 0.1% compared to other Asian currencies due to the nation’s ongoing political unrest. While the Indian rupee’s USD/INR pair remained at 85.8 rupees after reaching record highs over 86 rupees last week, the Singapore dollar’s USD/SGD pair increased by 0.1%.

Following a significant increase in overnight trading, the dollar index and dollar index futures stabilized in Asian trade on Wednesday.

Stronger-than-expected job openings data for November, which demonstrated that the labor market remained solid, were the key factor driving the greenback higher. The information was released just a few days before the December nonfarm payrolls data, which is expected to provide more conclusive indicators of the labor market this week.
Bets that inflation will stay sticky in the upcoming months were also bolstered by strong purchasing managers index data, which gave the Fed additional motivation to lower rates gradually.

Due to worries about sticky inflation and labor market strength, the central bank issued a warning that it will significantly halt its rate-cutting pace in 2025.

Longer and higher Because U.S. interest rates signal a narrower rate differential for regional assets, they are bad news for Asian markets.

Wednesday saw a slight recovery from the Japanese yen’s lowest level in almost six months, with the USD/JPY pair hovering around the low 158s.

Following a verbal warning from government officials about possible currency market intervention, traders became more cautious while shorting the Japanese currency, which helped the yen halt its recent losses.

Through December, the yen was beaten by the expectation of increasing U.S. interest rates and a dovish stance from the Bank of Japan, which brought the USDJPY pair near to levels where the government had last intervened. 160 yen is being watched by traders as a possible intervention target.

As markets consider conflicting CPI statistics, As traders processed the nation’s mixed inflation figures, the Australian dollar’s AUD/USD pair recovered early losses to trade flat. Although underlying inflation decreased somewhat, the headline consumer price index inflation for November was greater than anticipated.

Given that core inflation was still above the Reserve Bank of Australia’s goal range of 2% to 3%, the reading provided conflicting signals about when the bank could start lowering interest rates. Although some wagers for an earlier drop were sparked by Wednesday’s statistics, analysts do not anticipate the RBA reducing rates until the second quarter.

Since the US presidential election, the dollar has experienced a significant upswing from its pre-existing high, and according to Bank of America (NYSE:BAC) Securities, the currency is now perfectly priced.

After the longest rally in recent decades, which began in mid-2011, the dollar finished 2024 at a 55-year high in real effective terms, according to BoA estimates. In nominal terms, the USD has likewise risen to extremely high heights. In a note dated January 8, analysts at BoA Securities stated that the USD is at its strongest level in the past 30 years, when the time series began, according to the BIS NEER wide index (nominal effective exchange rate).

The US election was a major factor in the 6.4% increase in its overvaluation from the end of Q3 of last year. In contrast, it was only 9.4% overpriced at the end of 2016, following Trump’s victory in his first US election.

According to G10 equilibrium calculations, the USD is by far the most overpriced currency, followed by CHF, while the Scandies and JPY are the least overpriced. “We anticipate that the USD will continue to rise in the near future due to US inflationary policies, especially tariffs, but will decline later in the year when the US economy is negatively impacted and the rest of the world reacts. Our baseline is vulnerable to significant risks due to policy uncertainty.