This year, the Fed is expected to lower interest rates, which will positively impact these Asian currencies.

• Emerging markets tend to benefit from a weak U.S. dollar, especially when the Fed lowers interest rates outside of a crisis.
• The Indian rupee is expected to strengthen due to carry trades and the possibility that the Reserve Bank of India may tighten its monetary policy more gradually than its peers.
• The won will be strengthened by improving economic prospects in South Korea and the Fed's easing.

While the cut in interest rates by the U.S. Federal Reserve may not be beneficial for some countries, certain Asian currencies could see advantages.

Boosting interest rates can attract foreign investment and increase demand for a country's currency, while a weak U.S. dollar can be beneficial for emerging markets during times of Fed interest rate cuts.

In December, the Fed adopted a more dovish stance, and markets are now anticipating rate cuts by summer. According to the CME FedWatch tool, the first 25-basis-point rate cut in 2024 could occur as early as June.

The Fed's January meeting ended with the central bank keeping its benchmark borrowing rate within the range of 5.25% to 5.5%.

The Fed's loosening of monetary policy could benefit currencies like the , the and the .

Yuan can’t go any lower

Despite a series of negative news articles that have decreased investor confidence in China, there is optimism that the government will prevent the yuan from falling below a certain level.

Arun Bharath, chief investment officer at Bel Air Investment Advisors, predicts that China will continue to attempt to maintain the stability of the yuan against the dollar.

Bharath stated that although the exchange rate has weakened to a 7 handle on the USD/CNY rate, reflecting a weaker economic situation in China, further weakening is unlikely as policymakers start to be more aggressive in fiscal stimulus, credit growth, and propping up property values.

The Chinese currency's exchange rate is expected to remain close to the current rate of 7.10.

Unlike other major currencies, China tightly controls the onshore yuan through a daily midpoint fix to the greenback based on the yuan's previous closing level and inter-bank dealer quotations.

In 2020, the onshore yuan reached a 16-year low of 7.2981 against the dollar.

If the Fed reduces interest rates by summer, it is likely that the yield differentials between the world's two largest economies will decrease, easing some of the pressure on the Chinese yuan. Yield differentials are a way to compare bonds based on the differences in their yields.

Monex's head of FX analysis, Simon Harvey, stated that the People's Bank of China manages currency through its daily fixing, liquidity measures, regulatory channels, and instructing state banks to intervene.

The total value of dollars in China's FX reserves is unknown.

Rupee riding high

This year, the Indian rupee may benefit from carry trades, which involve borrowing low-yielding currencies like the U.S. dollar to purchase high-yielding assets such as bonds.

According to Anindya Banerjee, vice president of currency and derivatives research at Kotak Securities, a lot of carry trade against other currencies like the yen or the euro will occur once interest rates fall in the U.S. This will widen the interest rate differential, which is positive for the Indian currency.

The rupee may strengthen if the Reserve Bank of India slows down its monetary policy loosening more gradually than other central banks.

The RBI's rate cut pace will be slower than the Fed because India did not have the same inflation problem as Europe or America.

Banerjee explained that the reason for the decision is straightforward: since fiscal policy is functioning optimally, the economy is performing exceptionally well, and at this juncture, they do not want any overheating to occur.

The rupee has strengthened to as much as 82.82 against the dollar in the last three months, despite a 0.6% dip in 2023, which was a much smaller weakening compared to the prior year's 11% decline.

Pressure off Korea’s won

The economic prospects in South Korea are improving, and the looser Fed policy will help ease the strain on won that has been under pressure for three years.

Harvey of Monex believes that the Korean won will benefit from the Fed's easing cycle in the second half of the year, as lower U.S. rates will reduce pressure on KRW through the rates channel and lead to an uptick in the global growth outlook.

Harvey predicted that the extent of the Fed's cuts will determine the gains of the won, with the currency potentially gaining between 5% and 10% if the easing cycle is deep, or as little as 3% if it proves to be shallow.

This year, South Korea's economic prospects are anticipated to improve, with the International Monetary Fund forecasting 2.3% growth in 2024 and 2025, which is higher than the previous year's growth rate of 1.4%.