Strong dollar rattles Asian, EM currencies after Fed’s first rate hike in 3 years

The U.S. dollar's renewed strength following the Federal Reserve's first interest rate increase in three years sent shockwaves through Asian and emerging market currencies on Monday, though some markets showed signs of resilience amid diverging local factors.

The dollar index, which measures the greenback against six major currencies, held above the 100 mark at 100.33, its highest level in seven weeks. The broad-based dollar strength followed the Fed's September 16 decision to raise its benchmark rate by 25 basis points to a target range of 3.75–4.00%, the first hike since 2023.chosun+3

Fed's Hawkish Tone Drives Dollar Demand

Fed Chair Kevin Warsh struck a hawkish tone in the aftermath of the decision, stating that "the plain fact is that inflation is too high and has been for too long" and that recent inflation readings "do not tell me that underlying trends have meaningfully improved". Markets are now pricing in a roughly 56.5% chance of another rate hike at the Fed's October meeting, up from about 42.5% a week ago, according to the CME FedWatch tool.fxstreet

The Fed also raised its year-end policy rate projection from 3.8% to 4.1%, leaving room for additional hikes and fueling speculation of three or more increases by next summer.chosun

Mixed Fortunes Across Asia

In South Korea, the won-dollar exchange rate snapped a seven-session losing streak, closing at 1,381.0 won, down 2.3 won from the previous session. The rate had climbed from 1,336.1 won on September 9 to as high as 1,387.9 won intraday on Monday before reversing course. Dollar selling by exporters ahead of the Chuseok holiday and caution over potential Japanese foreign exchange intervention helped pull the rate lower, according to SBS News.news.sbs+1

The Indonesian rupiah fared worse, with USD/IDR extending its decline for an eighth consecutive session, trading around 17,850 as traders awaited Bank Indonesia's policy decision later this week.fxstreet

The Indian rupee bucked the regional trend, strengthening 24 paise to 95.72 against the dollar, buoyed by a retreat in Brent crude oil prices and foreign institutional inflows. Brent crude declined over 2% to $101.69 per barrel on Monday after a volatile week that saw prices touch $109.45.freepressjournal

Oil Prices and Fed Speeches in Focus

International oil prices remain a key variable. Crude above $100 per barrel pressures energy-importing nations like South Korea and India by increasing dollar demand from fuel importers. Speeches by New York and Richmond Fed presidents on September 22 and Cleveland and Philadelphia Fed presidents on September 24 could offer further clues on the pace of tightening.freepressjournal+1

Im Hwan-yeol, a researcher at Woori Bank, noted that "large current account surpluses offset" foreign currency outflows in South Korea, "driven primarily by semiconductor exports. If semiconductor companies maintain their dollar-selling stance, the exchange rate's upward momentum could ease".chosun