The recent softer U.S. consumer inflation readings have had a significant impact on Asian currencies. The dollar weakened to a one-month low, prompting traders to increase their bets on a potential September interest rate cut. This led to gains in most Asian currencies, although some regional units were held back by soft economic data and trade tensions, particularly in Japan, China, and Australia.
The dollar index and dollar index futures both fell by 0.2% in Asian trade following the release of the consumer inflation data. The lower-than-expected inflation numbers, along with softer retail sales data, raised hopes that inflation would continue to cool in the coming months. As a result, traders increased their expectations for a 25 basis point cut in interest rates in September, with the probability rising to nearly 54% from the previous week’s 49%.
The Japanese yen’s USDJPY pair, which is inversely related to the currency’s strength, fell by 0.6% to around 154 yen on Thursday. This decline continued from the overnight losses as the dollar weakened further. Despite the recent decrease, the pair remained above the levels seen earlier in May when the Japanese government was actively involved in currency market interventions.
The Japanese economy faced challenges as gross domestic product data showed a larger-than-expected contraction in the first quarter, with consumer spending stalling. This raised concerns about the Bank of Japan’s ability to continue raising interest rates in the future.
The Chinese yuan’s USDCNY pair only slightly fell in response to the trade tensions between Washington and Beijing. The imposition of stricter trade tariffs on China’s key industries, such as electric vehicles, medicines, and solar technology, negatively affected sentiment towards China. The upcoming release of Chinese industrial production and retail sales data is eagerly awaited to gauge the extent of the impact on the economy.
The Australian dollar’s AUDUSD pair remained steady after an unexpected increase in unemployment, signaling a potential cooling in the labor market. This development reduced the likelihood of the Reserve Bank raising interest rates further. Additionally, concerns over China weighed on the Australian dollar, which has a high trade exposure to the country.
Overall, most Asian currencies benefited from the weaker dollar resulting from softer U.S. consumer inflation readings. However, the impact was uneven across the region, with some countries facing challenges due to soft economic data and trade tensions. It remains to be seen how central banks in Asia will respond to these developments and whether further currency interventions will be necessary to stabilize exchange rates.