Asian currencies fall ahead of Fed policy decision

By Patturaja Murugaboopathy

(Reuters) - Asian currencies weakened on Wednesday as the dollar held firm near a four-month high on expectations that a strong U.S. economy would lead to more rate hikes this year.

Though market participants don't expect a Federal rate hike at the end of Wednesday's meeting, they are more optimistic about an increase in borrowing costs in June on the back of rising inflation and low unemployment.

The dollar index, which broke above its 200-day moving average this week, was trading near its four-month high of 92.57.

"The dollar index at 92.42 is on the cusp of a break - on close - which can propel it for the run to 95.20, which I would then be targeting," said Greg McKenna, chief market strategist at AxiTrader.

"The price pressures and tight labour market suggest both a strong U.S. economy and the need for the Fed to perhaps tighten three more times, not two, over the rest of the course of 2018."

Negative sentiment in regional currencies was also due to a decline in export orders in China, which highlighted potential risks to the trade sector from a bitter China-U.S. trade dispute.

Factory activity in South Korea also contracted for a second month in April as output and new orders shrank more quickly.

China's yuan dropped to a 2-1/2 month low after the central bank set a much lower official fixing, while the South Korean won fell nearly 1 percent.

A rise in U.S. bond yields also undermined regional currencies, with Thai baht and Indonesian rupiah, each shedding more than a quarter percent against the dollar.

The Malaysian ringgit dropped as investors worried about unwelcome surprises from the general election on May 9.

"Growing election uncertainty continues to keep investors at bay. While the chances of the opposition pulling off a surprise result remain low, a large scale knee-jerk negative repricing of Malaysian assets suggests foreign bond buyers will stay on the sidelines," said Stephen Innes, head of trading in Asia-Pacific for Oanda in a note.

"As such, the ringgit will continue to trade defensively

due to the heightened domestic political risk."

The dollar index has a tendency to strengthen in May due to some seasonality factors, which could be another negative for Asian currencies.

In the past 10 years, the dollar index has strengthened by 1.34 percent on average in May, falling only on two occasions.

AxiTrader's McKenna said with slowing export orders in Asia and a possibility of the Fed to signal four hikes this year, "the backdrop is there for significant appreciation of the U.S. dollar against the EM currencies."

(Reporting by Patturaja Murugaboopathy in Bengaluru; Additional Reporting by Gaurav Dogra and Harish Bhaskar; Editing by Eric Meijer)