The recent rise in geopolitical tensions between Iran and Israel has had a significant impact on Asian currencies, with most of them weakening on Tuesday. This has been coupled with increased bets on higher-for-longer U.S. interest rates, leading to a rise in the dollar to over five-month highs.
Despite stronger-than-expected Chinese gross domestic product data, the Chinese yuan remained relatively stable. However, softer-than-expected industrial production and retail sales data for March have raised concerns about the momentum of the Chinese economy. The People’s Bank of China’s decision to set a weak midpoint for the yuan has also added pressure on the currency, reflecting persistent selling biases.
The dollar index and dollar index futures rose in Asian trade, reaching their highest levels since early-November. This was supported by better-than-expected U.S. retail sales data for March, which has boosted inflation expectations. Traders have adjusted their bets on a June rate cut by the Federal Reserve following strong economic data, with a focus now on Fed Chair Jerome Powell’s upcoming address for further guidance.
Amid fears of higher-for-longer U.S. rates and weak risk appetite due to escalating tensions in the Middle East, Asian currencies have faced downward pressure. Safe haven demand has driven traders towards the dollar, leading to a decline in the Australian dollar, South Korean won, Singapore dollar, and Indian rupee. The Japanese yen has also weakened, reaching a new 34-year high against the USD.
Despite warnings against excessive forex speculation by Japanese government officials, the yen has continued to weaken. Speculation of potential intervention in currency markets to stabilize the yen remains high, as traders anticipate steps to bring down the USDJPY pair. Intervention by the Japanese government typically involves significant selling of dollars to influence exchange rates.
The geopolitical tensions between Iran and Israel, combined with economic data from China and the U.S., have significantly impacted Asian currencies. The uncertainty surrounding interest rates and the stability of the global economy has led to a shift in investor sentiment, favoring safe haven assets like the dollar. As tensions continue to escalate and economic indicators fluctuate, Asian currencies are likely to face further challenges in the coming months.