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Asian Currencies Weaken as Markets Await US Inflation Data; Yen Dips Amidst Limited BOJ Support

Asian currencies saw a weakening trend on Friday, while the dollar stabilized as markets awaited crucial inflation figures that are anticipated to influence the Federal Reserve’s policy on interest rates.

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The decline in the dollar overnight, prompted by weaker-than-expected U.S. gross domestic product data, provided some respite to Asian currencies. However, this relief was tempered by persistent expectations of prolonged higher U.S. interest rates. The dollar also recovered some of its losses during Asian trading hours.

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The Japanese yen exhibited weakness, with the USDJPY pair surpassing 156 to reach new 34-year highs following comments from the Bank of Japan (BOJ), which raised doubts about the central bank’s ability to further increase interest rates. Despite leaving interest rates unchanged after a historic hike in March and forecasting higher inflation in the coming years, the BOJ also projected weaker growth for the Japanese economy, casting uncertainty on its capacity to continue raising interest rates and presenting a predominantly dovish outlook for the yen. The release of softer-than-expected consumer price index inflation data from Tokyo earlier on Friday further fueled doubts regarding a hawkish BOJ stance. However, concerns about government intervention in currency markets and anticipation of a press conference with BOJ Governor Kazuo Ueda presented potential for more hawkish signals.

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In broader Asian currency markets, persistent concerns about prolonged higher U.S. interest rates led to weakening. The Chinese yuan’s USDCNY pair edged up slightly and remained near recent five-month highs. The South Korean won’s USDKRW pair rose by 0.4%, while the Singapore dollar’s USDSGD pair gained 0.1%.

The Australian dollar’s AUDUSD pair received support from robust producer price index inflation data, coupled with a higher Consumer Price Index (CPI) reading earlier in the week, sparking expectations of prolonged higher rates in the country.

The Indian rupee’s USDINR pair remained relatively unchanged, with traders cautious amidst expectations of increased volatility in Indian markets as the 2024 general elections commenced.

The dollar index and dollar index futures registered marginal gains in Asian trading, recovering from overnight losses. Despite weaker-than-expected GDP growth in the U.S. economy during the first quarter, inflation remained uncomfortably high, with the GDP price index exceeding expectations. Attention turned to the upcoming Personal Consumption Expenditures (PCE) price index data, the Federal Reserve’s preferred inflation gauge. Despite Thursday’s weak GDP reading, traders appeared to be gradually ruling out expectations for near-term rate cuts by the Fed, with the CME Fedwatch tool now indicating expectations for rate cuts only by September or the fourth quarter.

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