As forecasts of fewer interest rate cuts by the Federal Reserve have dented the appetite for regional markets, most Asian currencies have weakened. This trend is observed even as the dollar fell on a soft inflation reading. The uncertainty surrounding a Bank of Japan meeting and concerns over U.S.-China trade tensions have also weighed on sentiment towards Asian currencies.
Bank of Japan Policy Meeting
The USDJPY pair moved little after experiencing some volatility earlier in the week. Traders are now awaiting further cues on policy from the BOJ on Friday. Although the central bank is likely to keep rates steady, there is an expectation for a reduction in some of its bond purchases to tighten policy. However, doubts remain among traders about the extent to which the BOJ has room to tighten policy, given recent economic weaknesses in Japan.
The dollar index and dollar index futures both saw a slight rise in Asian trade due to hawkish signals from the Federal Reserve. Chair Jerome Powell’s announcement that the central bank now only sees the possibility of one rate cut this year, as opposed to prior forecasts of three, has influenced market sentiment. Some policymakers even advocated for no rate cuts this year, citing sticky inflation concerns. The Fed’s decision to increase its inflation forecast for 2024 further highlighted its confidence in the economy.
Impact on Risk-driven Currencies
Following the Fed’s comments, the dollar steadied, indicating that higher rates in the foreseeable future would benefit the greenback. This scenario is likely to negatively affect risk-driven currencies. PPI data scheduled for later on Thursday is expected to provide more insights into inflation, which is crucial for determining future market movements.
The Chinese yuan’s USDCNY pair rose by 0.1% amid reports of heightened U.S. trade scrutiny against China. This development has impacted sentiment towards the yuan in recent days. Similarly, the South Korean won’s USDKRW pair and the Singapore dollar’s USDSGD rose by 0.3% and 0.2%, respectively. Conversely, the Australian dollar’s AUDUSD pair fell by 0.2%, despite stronger than expected employment data for May. This data might give the Reserve Bank more flexibility to maintain higher rates for an extended period.
The outlook for Asian currencies remains uncertain as market participants continue to assess the impact of the Fed’s rate cut forecasts and other geopolitical factors on regional economies. Vigilance and adaptability will be key for investors navigating through these challenging times.