Investing.com — Most Asian currencies weakened Thursday as forecasts of fewer Federal Reserve interest rate cuts hit appetite for regional markets, even as the dollar fell on soft inflation.
Uncertainty ahead of a Bank of Japan meeting and concerns about US-China trade friction also weighed on sentiment towards Asian currencies.
Japanese yen flat, BOJ waited for more signals
The Japanese yen pair moved little after seeing some volatility earlier this week, with traders now waiting for more signals on policy on Friday.
The central bank is likely to keep interest rates steady but is expected to scale back some of its bond purchases in an effort to tighten policy.
While tighter monetary conditions are expected to provide some support to the yen, traders questioned how much room the BOJ has to tighten policy given recent signs of economic weakness in Japan.
Still, inflation data for May showed some improvement, which could echo the BOJ’s forecast of an eventual rise in inflation this year.
The dollar remains stable as the Fed outlook offsets weak CPI
The and both rose slightly in Asian trading as traders processed aggressive signals from the Fed.
Chairman Jerome Powell said the central bank now sees only the possibility of one rate cut this year, down from previous forecasts of three. Some policymakers even called for no interest rate cuts this year, given persistent inflation.
The Fed also raised its inflation forecast for 2024.
But the Fed’s comments were preceded by inflation, which showed that inflation cooled slightly more than expected in May. The outcome negatively impacted the dollar and pushed down government bond yields as traders bought into the disinflation story.
But the dollar held steady after the Fed’s comments, given that high longer-term interest rates are likely to benefit the dollar. Such a scenario also does not bode well for risk-driven currencies.
data due later on Thursday is expected to provide more clues on inflation.
The broader Asian currencies largely retreated and followed this idea. The Chinese yuan pair rose 0.1% after reports of more US trade controls on China dented sentiment towards the yuan this week.
The South Korean won pair and the Singapore dollar rose 0.3% and 0.2% respectively.
The Australian dollar pair fell 0.2%, even more than expected for May, giving the Reserve Bank more leeway to keep rates high for longer.
But a continued decline in hours worked still indicated some slowdown in employment.
The Indian rupee pair remained close to record highs as sentiment towards the currency remained fragile following a shock outcome in the 2024 general elections.
