LONDON: Emerging Asian stock markets were higher on Tuesday and currencies traded broadly flat against a stronger dollar as investors braced for fewer rate cuts by the Federal Reserve in the coming year.
MSCI's broadest index of Asia-Pacific shares outside Japan rose up to 0.6 per cent, tracking overnight gains on Wall Street. The MSCI index of international emerging markets equities also rose 0.3 per cent.
Equities in Malaysia, Singapore and Thailand added between 0.3 per cent and 0.5 per cent.
"Positioning levels have remained relatively subdued in Asia, with most markets near neutral. The recent trend, however, remains consistent, with rising bearish flows, which has rapidly reduced net positioning," analysts at Citi said in a note. Fed policymakers lowered their rate cut projections for 2025 last week to 50 basis points, from 100 basis points, and increased their inflation forecast.
Markets are now pricing in just about 35 basis points of easing for 2025, which has in turn sent U.S. Treasury yields surging and the dollar to new highs.
Against a basket of currencies, the U.S. dollar was perched near a two-year peak. U.S. Treasury yields also rose overnight, with the 10-year yield reaching its highest level in nearly seven months. Higher U.S. rates could lead to currency and capital flow problems for emerging markets. The dollar's yield advantage could drive capital out of their markets while weakening their currencies, potentially spawning inflationary pressures and market volatility. The Indonesian rupiah was last down 0.2 per cent, still hovering near the 16,200 per dollar level, and the Chinese yuan was near a 13-month low.
The Indian rupee dropped to its all-time low and traders suggested the Indian central bank was likely selling dollars to limit the rupee's losses.
The South Korean won inched 0.1 per cent lower, after hitting its weakest level in 15 years last week.
The Malaysian ringgit, the only currency in Asia to log a gain so far this year, was largely flat at 4.486 per dollar, while the Thai baht, which is marginally down for the year, was last up 0.2 per cent.
Jeff Ng, head of Asia Macro Strategy at Sumitomo Mitsui Banking Corporation said the won and the Philippine peso may be relatively more vulnerable to dollar strength in the near term.
He added that Thailand's economic growth may improve in the latter half of 2025, helping with slight baht rebounds. Markets in the Philippines were closed for a holiday.