The portrait of Mahatma Gandhi is depicted on Indian rupee banknotes in an arranged photo in Bangkok, Thailand on Wednesday, September 12, 2018.
Brent Lewin | Bloomberg | Getty Images
The Fed shifted to a more dovish stance in December, with markets now pricing in rate cuts by the summer. The CME FedWatch tool suggested the first 25 basis point rate cut of 2024 could come as early as June.
The Fed's January meeting ended with the central bank keeping its key interest rate in a range between 5.25% and 5.5%.
Experts told CNBC that currencies such as the Chinese yuan, the Korean won and the Indian rupee would benefit from the Fed's easing monetary policy.
China has weathered a series of disappointing headlines that have dented investor confidence. But hopes that authorities would not allow the trade-dependent country's currency to weaken below a certain level have kept yuan pessimism in check.
China has tried to stabilize the yuan against the dollar in the past and will likely continue to do so, according to Arun Bharath, chief investment officer at Bel Air Investment Advisors.
“While the exchange rate has fallen to a value of 7 against the USD/CNY exchange rate, reflecting weaker economic conditions in China, further weakening is unlikely as policymakers begin to be more aggressive on fiscal stimulus, credit growth and supporting property values to proceed.” “said Bharath.
He noted that the Chinese currency's exchange rate is likely to fluctuate in “a narrow band around the current exchange rate of 7.10.”
Unlike other major currencies such as the Japanese yen or the US dollar, whose exchange rates fluctuate freely, China maintains tight control over the onshore yuan. The currency is pegged to the greenback with a so-called daily midpoint fix, which is based on the yuan's previous closing price and interbank dealer quotes.
Last year, the onshore yuan hit its lowest level in 16 years at 7.2981 against the dollar.
If the Fed begins cutting interest rates by the summer, it would likely narrow yield differentials between the world's two largest economies and ease some pressure on the Chinese yuan. Yield differentials are a way to compare bonds based on the differences between their yields.
The People's Bank of China is a key player in managing the currency, which can be achieved through daily fixings, liquidity measures, regulatory channels and directing state-owned banks to intervene, according to Simon Harvey, head of foreign exchange analysis at Monex.
This last method is the most opaque because the total value of dollars in China's foreign exchange reserves is unknown.
The Indian rupee could benefit this year from carry trades, a strategy in which traders borrow low-yielding currencies like the U.S. dollar to buy high-yielding assets like bonds.
“Lots of carry trades against other currencies like the yen or euro, but once interest rates fall in the US we will see the interest rate differential widen to allow carry trades. So this is also positive for the Indian currency,” said Anindya Banerjee, vice president of currency and derivatives research at Kotak Securities.
The rupee could also strengthen on hopes that the Reserve Bank of India might ease monetary policy more slowly than other central banks.
Banerjee noted that the RBI's rate-cutting pace will be “far slower” than the Fed's and “will always lag well behind the Fed because India has not had the same inflation problem as Europe or America.”
“The reason is simple: fiscal policy is in full swing, the economy is doing very well and they don’t want it to overheat at this point,” Banerjee said.
The rupee has risen as high as 82.82 against the dollar in the last three months. The currency fell 0.6% in 2023, a much smaller weakening against the dollar than last year when the decline was 11%.
South Korea's won has been under pressure for three years, but improving economic prospects and looser Fed policy will help ease those pressures in 2024.
“As a low-yielding and highly cyclical currency, we believe the Korean won will be one of the key beneficiaries of the Fed's easing cycle in the second half of the year, as lower US interest rates not only ease pressure on KRW through the interest rate channel “But it will also lead to an improvement in global growth prospects,” said Monex’s Harvey.
But Harvey said the won's gains would also depend on the extent of Fed cuts. He predicted the currency could gain between 5% and 10% if the easing cycle is deep and just 3% if the cycle proves flat.
South Korea's economic prospects are also expected to improve this year. The International Monetary Fund forecast growth of 2.3% for 2024 and 2025, above the previous year's growth of 1.4%.