Investing.com – Most Asian currencies traded in a narrow range on Tuesday, while the dollar continued its overnight gains as investors position themselves for a slower pace of interest rate cuts in the coming year.

Trading volumes were subdued ahead of the Christmas break, while most regional currencies have suffered significant losses against the dollar this year.

Asian currencies weakened sharply last week after the Federal Reserve effectively halved its outlook for interest rate cuts in 2025, citing concerns about persistent U.S. inflation.

The dollar is close to a two-year high amid hawkish interest rate prospects

Both indexes and rose about 0.1% in Asian trading, extending overnight gains and rebounding from last week’s two-year high.

While the dollar did see some weakness following November’s lower-than-expected data, this was largely offset by investors withdrawing expectations for interest rate cuts in 2025.

The Fed has signaled only two rate cuts in the coming year, fewer than its earlier forecast of four.

Higher U.S. interest rates are reducing the attractiveness of risk-based Asian markets, limiting the amount of capital flowing into the region and putting pressure on regional markets.

Asia FX under pressure from stiff US interest rate outlook

Most Asian currencies have weakened in recent sessions on the prospect of slower rate cuts in the US, while uncertainty over local monetary policy and slowing economic growth have also been a factor.

The Japanese yen pair fell 0.1% on Tuesday after rising as high as 158 yen in recent sessions after the Bank of Japan signaled it would take time to consider further interest rate increases.

The Australian dollar pair fell 0.2% after minutes from the Reserve Bank’s December meeting showed policymakers noted an eventual easing of monetary policy, citing some progress in lowering inflation. However, they still signaled a potential risk of inflation growth.

The Chinese yuan pair rose 0.1% and remained near a one-year high as the currency weighed on the prospect of greater fiscal spending and looser monetary conditions in the coming year.

Beijing has signaled it will escalate fiscal spending in 2025 to support slowing economic growth.

The Singapore dollar pair rose 0.1% while the Indian rupee pair rose 0.1% after hitting a record high above 85 rupees.