By Ambar Warrick

-- Asian currencies sank on Thursday after the Federal Reserve projected a more hawkish stance than markets were expecting, while concerns over rising COVID-19 cases in China and worsening economic conditions also weighed.

The Federal Reserve hiked interest rates by a (bps) on Wednesday and said that it will raise rates at a more moderate pace in the coming months.

But that borrowing costs are likely to peak at higher-than-expected levels, given that inflation is still running well above the central bank’s target range.

Analysts said that the Fed needs inflation to retreat further before it can taper its hawkish stance, and is likely to keep raising rates till then.

Such a scenario bodes poorly for Asian currencies, given that they fell sharply this year as the gap between risky and low-risk debt narrowed.

High-risk Southeast Asian currencies were the biggest decliners for the day. The lost 0.7%, while the and shed 0.4% and 0.3%, respectively.

Concerns over slowing economic growth in China also weighed on regional sentiment. The shed 0.1% after data showed both and sank below expectations in November due to COVID-related disruptions.

While the country has now begun relaxing several COVID-related curbs, it is facing an unprecedented spike in infections, so much so that the government said it was now impossible to track the spread of the virus in the country. Analysts warned that rising infections will likely spur some near-term volatility in local markets.

The fell 0.1% after data showed the country’s shrank less than expected in November, heralding more pressure on the economy.

The and steadied from recent losses on Thursday, but remained under pressure from uncertainty over U.S. monetary policy. The Fed’s warning on higher rates comes even as inflation eased more than expected in the past two months.

Even so, early data shows that a majority of market participants are expecting a by the Fed in February. Smaller rate hikes are likely to spur more pressure on the dollar, which has already fallen in recent weeks amid growing signs that has peaked this year.

Focus on Thursday is also on interest rate decisions by the and the . Both banks are expected to hike rates by 50 basis points, as they move to contain record-high increases in inflation this year.