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Asia FX weakens as hawkish Fedspeak offsets inflation relief; BOJ awaited

Published 13/06/2024, 05:30
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Investing.com-- Most Asian currencies weakened on Thursday as forecasts of fewer interest rate cuts by the Federal Reserve dented appetite for regional markets, even as the dollar fell on a soft inflation reading. 

Uncertainty before a Bank of Japan meeting and concerns over U.S.-China trade ructions also weighed on sentiment towards Asian currencies. 

Japanese yen flat, BOJ awaited for more cues 

The Japanese yen’s USDJPY pair moved little after seeing some volatility earlier in the week, with traders now awaiting more cues on policy from the BOJ on Friday.

The central bank is likely to keep rates steady, but is expected to scale back some of its bond purchases in a bid to tighten policy. 

While tighter monetary conditions are expected to offer some support to the yen, traders were doubtful over just how much headroom the BOJ has to tighten policy, given recent signs of economic weakness in Japan. 

Still, producer price index inflation data for May showed some improvement, which could tie into the BOJ’s forecast of an eventual pickup in inflation this year. 

Dollar steadies as Fed outlook offsets weak CPI 

The dollar index and dollar index futures both rose slightly in Asian trade, as traders digested hawkish signals from the Fed. 

Chair Jerome Powell said the central bank now only saw the possibility of one rate cut this year, down from prior forecasts of three. Some policymakers even called for no rate cuts this year in the face of sticky inflation. 

The Fed also hiked its inflation forecast for 2024.

But the Fed’s comments were preceded by consumer price index inflation showing that inflation cooled slightly more than expected in May. The reading battered the dollar and pushed down Treasury yields, as traders bought into the disinflation narrative. 

But the dollar steadied after the Fed’s comments, given that high for longer rates are likely to benefit the greenback. Such a scenario also bodes poorly for risk-driven currencies.

PPI data due later on Thursday is expected to offer more cues on inflation.

Broader Asian currencies mostly retreated tracking this notion. Chinese yuan's USDCNY pair rose 0.1%, as reports of more U.S. trade scrutiny against China dented sentiment towards the yuan this week.

The South Korean won’s USDKRW pair and the Singapore dollar’s USDSGD rose 0.3% and 0.2%, respectively. 

The Australian dollar’s AUDUSD pair fell 0.2% even as employment data read stronger than expected for May, which gives the Reserve Bank more headroom to keep rates high for longer.

But a sustained decline in hours worked still pointed to some cooling in employment. 

The Indian rupee’s USDINR pair remained close to record highs, as sentiment towards the currency remained fragile after a shock result in the 2024 general elections. 

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