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Asia FX weakens, dollar steady as Fed signals no hurry to cut rates

Published 22/02/2024, 04:52
© Reuters.
- Most Asian currencies retreated on Thursday, while the dollar stemmed recent losses as a slew of signals from the Federal Reserve showed that the central bank was likely to keep interest rates high in the near-term.

Weak purchasing managers index (PMI) readings from Australia and Japan also saw Asian traders favor the dollar, as business activity in both countries slowed through February. 

Dollar stems decline after Fed reiterates rate outlook 

The dollar index and dollar index futures both steadied in Asian trade after retreating sharply from three-month highs this week, although the prospect for further losses in the greenback now appeared limited. 

The minutes of the Fed’s late-January meeting showed that the bank was in no hurry to reduce interest rates in the near-term. Addresses from several Fed officials this week also reiterated this hawkish stance, with policymakers citing concerns over sticky inflation. 

The messaging saw traders steadily pricing down expectations for rate cuts in May and potentially June, which bodes poorly for Asian currencies, as the gap between risky and low-risk yields remains narrow. 

This notion kept most Asian currencies trending weaker on Thursday. The Chinese yuan fell 0.1%, slipping back towards the 7.2 level as investors remained doubtful over an economic rebound in the country.

Bigger losses in the yuan were held back by signs of government intervention in currency markets this week.

Japanese yen, Australian dollar hit by weak PMIs

The Japanese yen weakened 0.1% and was back above the 150 level to the dollar, as the prospect of higher-for-longer U.S. rates pointed to a sustained gap between local and U.S. yields. 

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Weaker-than-expected PMI data also cast a pall over the yen, as manufacturing activity shrank further in February while growth in services worsened. 

Still, markets remained on watch for any intervention in currency markets by the Japanese government, following some verbal warnings from ministers last week. But the yen remained pinned at three-month lows.

The Australian dollar was flat as preliminary PMI data for February showed sustained weakness in business activity. But recent stronger-than-expected wage price index data, released on Wednesday, saw traders pricing in a greater chance that the Reserve Bank of Australia will keep interest rates higher for longer. 

Broader Asian currencies moved in a flat-to-low range. The Singapore dollar tread water, while the South Korean won rose 0.2% after the Bank of Korea left interest rates unchanged and signaled no immediate plans to begin loosening monetary policy.

The Indian rupee hovered just below the 83 level to the dollar, with Indian services PMI due later in the day.

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