Asian currencies gained strength on Tuesday, with the Japanese yen nearing a 2024 high as the U.S. dollar weakened due to growing expectations of a significant interest rate cut by the Federal Reserve later this week.

Trading in the region was relatively quiet, with market holidays in China and South Korea reducing volumes. Investors are also awaiting the outcome of the Federal Reserve’s decision on Wednesday, which kept many traders cautious.

Dollar Slips as Focus Shifts to Possible 50 Basis Points Cut

The U.S. dollar index and dollar index futures dropped by around 0.1% during Asian trading hours, extending their decline from the previous session. The weakening of the dollar is driven by increasing speculation that the Federal Reserve will cut interest rates by 50 basis points at the conclusion of its meeting on Wednesday. This could mark the beginning of a broader easing cycle, with total rate cuts potentially reaching 100 basis points by the end of the year.

According to data from CME’s Fedwatch tool, traders are currently pricing in a 68% likelihood of a 50 basis point cut, while a 25 basis point cut has a 32% chance.

Lower U.S. interest rates tend to diminish the dollar’s appeal, prompting investors to seek better returns in higher-risk markets like Asia, a scenario that typically benefits regional currencies.

Economic Concerns in China Weigh on Sentiment

Despite the broader gains among Asian currencies, market sentiment remained cautious due to concerns over slowing economic growth in China. However, several regional currencies managed to post modest gains. The Australian dollar edged slightly higher, while the Singapore dollar remained steady.

The offshore Chinese yuan saw a slight decline amid weak economic data from China, further contributing to expectations of continued yuan weakness. Chinese markets remained closed for a second day.

Meanwhile, the Indian rupee eased further from recent record highs, having reached a peak in August.

Yen Strengthens Ahead of Bank of Japan Meeting

The Japanese yen remained strong, trading near its highest levels of the year as anticipation grew over lower U.S. interest rates. Investors have been building long positions in the yen ahead of the Bank of Japan’s (BOJ) policy meeting on Friday.

While analysts do not expect the BOJ to raise rates, policymakers are expected to take a more hawkish stance and signal potential future rate increases in response to rising inflation. Japan’s consumer inflation data for August, due to be released on Friday, is also expected to show an uptick.