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Asia FX Weakens as Dollar Strengthens Amid Reassessment of Rate Cut Expectations

On Wednesday, most Asian currencies experienced depreciation while the dollar gained ground, prompted by remarks from Federal Reserve officials leading to a reassessment of expectations for U.S. interest rate cuts.

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Despite ongoing warnings from Japanese government officials regarding potential intervention in currency markets, the Japanese yen continued to underperform against its counterparts, weakening against the dollar.

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Meanwhile, the Australian dollar sustained its losses following a Reserve Bank of Australia (RBA) statement that was less hawkish than anticipated during Tuesday’s session.

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Japanese Yen Weakens as USDJPY Climbs Despite Intervention Threats

The Japanese yen saw its USDJPY pair rise by 0.3%, surpassing the 155 level and nearing the 34-year highs recorded last week, despite earlier intervention attempts by the Japanese government. Although the dollar experienced some weakness, renewed speculation against the yen emerged amidst uncertainty about U.S. interest rate cuts, despite ongoing warnings from Japanese officials against sustained yen weakness.

Australian Dollar Extends Losses Following Less Hawkish RBA Statement

The Australian dollar’s AUDUSD pair depreciated by 0.4% on Wednesday, extending the sharp declines witnessed in the previous session after the RBA adopted a less hawkish stance than expected. While the RBA chose to maintain interest rates and cautioned about persisting inflation, it refrained from suggesting further rate hikes, a possibility that had been priced into the Aussie leading up to the meeting. Consequently, markets adjusted expectations of rate hikes for the Australian dollar, which had reached nearly two-month highs prior to Tuesday’s meeting.

However, limited losses are anticipated for the Aussie as interest rates remain near 12-year highs, potentially throughout 2024.

Dollar Strengthens Amid Cooling Rate Cut Bets by Fed Officials

The dollar index and dollar index futures observed a 0.1% increase in Asian trading, building on overnight gains subsequent to warnings from a plethora of Fed officials indicating a likelihood of unchanged U.S. rates for the remainder of the year. Despite some speculation following softer-than-expected nonfarm payrolls data last week, Fed officials reiterated concerns about persistent inflation, reinforcing expectations of static rates. This bolstered the dollar and exerted pressure on most risk-driven assets, leading to sustained weakness in Asian currencies.

The Chinese yuan’s USDCNY pair saw a 0.1% rise, with market attention directed towards trade data for April scheduled for release on Thursday, providing further insights into Asia’s largest economy.

Meanwhile, the South Korean won’s USDKRW pair surged by 0.5%, and the Singapore dollar’s USDSGD pair added 0.1%. The Indian rupee’s USDINR pair remained close to record highs above 83.5, with heightened volatility expected amidst the 2024 general elections.

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