The weakening of most Asian currencies on Thursday can be attributed to the forecasts of fewer interest rate cuts by the Federal Reserve. This outlook has diminished the appetite for regional markets, leading to a lackluster performance in Asian currencies. The dollar, on the other hand, experienced a decline due to a soft inflation reading.
Uncertainty Surrounding Bank of Japan Meeting
Uncertainty before the Bank of Japan meeting also contributed to the subdued sentiment towards Asian currencies. Traders are awaiting more cues on policy from the BOJ on Friday, with expectations that the central bank will keep rates steady but may scale back some of its bond purchases to tighten policy. However, doubts loom over the BOJ’s ability to tighten policy given recent economic weakness in Japan.
While producer price index inflation data for May showed some improvement, doubts still remain regarding the BOJ’s forecast of an eventual pickup in inflation this year. The dollar index and dollar index futures rose slightly in Asian trade, aligning with hawkish signals from the Federal Reserve. Chair Jerome Powell’s comments regarding the possibility of only one rate cut this year, down from prior forecasts of three, also influenced market sentiment.
The cooling of inflation in May initially battered the dollar and pushed down Treasury yields as traders bought into the disinflation narrative. However, the dollar steadied after the Fed’s comments, indicating that high rates for longer periods are likely to benefit the greenback. This scenario does not bode well for risk-driven currencies, leading to a retreat in broader Asian currencies.
The Chinese yuan’s USDCNY pair rose due to reports of increased U.S. trade scrutiny against China, weighing on sentiment towards the yuan. Meanwhile, the South Korean won’s USDKRW pair and the Singapore dollar’s USDSGD rose, indicating varied performance among Asian currencies. The Australian dollar’s AUDUSD pair fell despite stronger than expected employment data for May, suggesting that the Reserve Bank may maintain high rates for longer durations.
The performance of Asian currencies is heavily influenced by a combination of factors such as Federal Reserve rate cut forecasts, inflation data, central bank policies, and global trade tensions. Traders will continue to monitor these developments closely to gauge the future direction of Asian currencies in the market.