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Asia FX Gains Ground as CPI Data Weakens Dollar, Fuels Rate Cut Speculation

Most Asian currencies saw gains on Thursday following softer U.S. consumer inflation readings that pushed the dollar to a one-month low, prompting traders to increase bets on a potential interest rate cut in September.

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However, the upward momentum in some regional currencies was tempered by a mix of soft economic data and ongoing trade tensions, particularly in Japan, China, and Australia.

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Dollar Hits Over 1-Month Low Amid CPI Data, Heightening Rate Cut Expectations

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The dollar index and dollar index futures experienced a 0.2% decline each in Asian trading, extending significant losses from the previous session after April’s month-on-month consumer price index (CPI) inflation and core CPI readings came in cooler than anticipated.

These readings, coupled with softer-than-expected retail sales data, raised hopes that inflation would continue to moderate in the coming months, providing the Federal Reserve with greater confidence to initiate interest rate cuts.

As a result, traders increased their expectations for a 25 basis point cut in September, with the probability rising to nearly 54% from the previous week’s 49%, according to the CME Fedwatch tool.

However, it’s worth noting that while the CPI reading remained above the Fed’s 2% annual target, several Fed officials cautioned over the past week that the central bank would require more convincing evidence of declining inflation.

Japanese Yen Recovers Despite Weak GDP Figures, Doubts Over BOJ’s Policy Space

The USD/JPY pair, which typically moves inversely to the strength of the yen, declined by 0.6% to around 154 yen on Thursday, extending losses from the previous session as the dollar weakened. Despite this, the pair remained significantly above levels observed earlier in May, when government intervention in currency markets was apparent.

The yen’s recovery, however, was hindered by GDP data revealing that the Japanese economy contracted more than anticipated in the first quarter, with consumer spending stalling. This raised doubts regarding the Bank of Japan’s capacity to continue raising interest rates.

Chinese Yuan, Australian Dollar Lag Amid Trade Tensions and Economic Concerns

The USD/CNY pair saw only a slight decline as sentiment towards China was dampened by Washington’s imposition of stricter trade tariffs on key Chinese industries such as electric vehicles, medicines, and solar technology. Beijing retaliatory threats further contributed to the subdued sentiment. Market participants are awaiting Chinese industrial production and retail sales data due on Friday for further cues.

Meanwhile, the AUD/USD pair showed minimal movement as an unexpected rise in unemployment heightened concerns of a cooling labor market in Australia, thereby reducing the impetus for the Reserve Bank to raise interest rates. Additionally, worries over China’s economic outlook weighed on the Aussie, given its significant trade exposure to the country.

Other Asian currencies advanced against a weaker dollar, with the USD/KRW pair falling by 0.4% for the South Korean won and the USD/SGD pair decreasing by 0.1% for the Singapore dollar.

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