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Asian Currencies Weaken as Dollar Stabilizes; RBA Moderates Hawkish Tone

Asian currencies faced downward pressure on Tuesday, while the dollar found stability as market attention remained fixated on the timing of potential interest rate adjustments by the Federal Reserve.

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The Japanese yen continued its underperformance, shedding gains acquired through recent government interventions. Last week’s apparent instances of government dollar selling propelled the USDJPY pair higher by 0.4%, surpassing the 154 level. Although the currency pair had surged to 160 in late April, subsequent government interventions swiftly pushed it downward to as low as 152. However, the yen struggled to sustain its strength due to the persistent gap between U.S. and Japanese interest rates. Market participants are now closely monitoring Japanese inflation and wage growth data to assess the likelihood of further interest rate hikes by the Bank of Japan, which could potentially alleviate pressure on the Japanese currency. Despite repeated verbal warnings of additional intervention by Japanese officials, traders perceive the USDJPY at 160 as a pivotal threshold for government actions.

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The Australian dollar faced a decline following the Reserve Bank of Australia’s (RBA) less hawkish stance than anticipated. The AUDUSD pair dipped by 0.3% after the RBA maintained interest rates as expected and cautioned that inflation’s moderation might take longer than anticipated. However, the RBA refrained from signaling further rate hikes, disappointing traders who had positioned themselves for such indications, particularly after a first-quarter inflation reading surpassed expectations. This lack of forward guidance regarding rate hikes, coupled with weak retail sales data for the first quarter, contributed to the Australian dollar’s weakness, as higher interest rates typically render the currency more appealing.

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In broader markets, Asian currencies experienced marginal declines as the dollar index and dollar index futures recuperated from last week’s losses. This week’s focus revolves around remarks from several Fed officials regarding the trajectory of interest rates, particularly after softer-than-expected nonfarm payrolls data prompted traders to once again factor in potential interest rate cuts by the central bank. Nonetheless, this sentiment failed to buoy Asian currencies, given the expectation that the Fed is unlikely to commence rate cuts until September.

The Chinese yuan’s USDCNY pair appreciated by 0.2%, while the South Korean won’s USDKRW pair advanced by nearly 0.3%. Similarly, the Singapore dollar’s USDSGD pair rose by 0.1%, while the Indian rupee’s USDINR pair edged slightly higher, nearing record highs reached in late April.

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