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Asia FX Faces Pressure as Dollar Hits 10-Day High Amid Diminished Rate Cut Expectations

Most Asian currencies experienced declines on Friday, with traders grappling with hawkish signals regarding inflation and interest rates, leading to a further reduction in expectations for rate cuts in 2024.

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Key Highlights:

Dollar Strengthens: The dollar index and dollar index futures reached 10-day highs on Friday, exerting pressure on Asian currencies. This rebound in the dollar followed the release of the Federal Reserve’s late-April meeting minutes, coupled with hawkish comments from Fed officials, which raised concerns about persistent inflation and delayed potential interest rate cuts.

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Revised Rate Cut Expectations: Traders adjusted their expectations for interest rate cuts in September, with the CME Fedwatch tool indicating a nearly equal probability of a rate cut or hold, compared to earlier expectations favoring a rate cut. This adjustment contributed to the dollar’s strength against Asian currencies.

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Japanese Yen Weakens: The Japanese yen weakened against the dollar, with the USDJPY pair rising to an over three-week high. Despite softer-than-expected consumer price index data for April, which indicated weak spending and raised doubts about the Bank of Japan’s policy tightening plans, the yen struggled to find support.

Chinese Yuan’s Limited Losses: The Chinese yuan’s losses were restrained by a stronger midpoint fix from the People’s Bank of China, offsetting selling pressure resulting from concerns about a trade war with the U.S., doubts regarding stimulus measures, and heightened tensions with Taiwan. However, the USDCNY pair remained close to a six-month high.

Broader Asian Currencies Retreat: Other Asian currencies also retreated, with the South Korean won’s USDKRW pair and the Singapore dollar’s USDSGD pair experiencing increases, while the Australian dollar’s AUDUSD pair declined. Most regional currencies were poised for significant weekly losses due to concerns about prolonged high U.S. interest rates.

Outlook:

The ongoing strength of the dollar, coupled with diminished expectations for rate cuts, is likely to continue exerting pressure on Asian currencies in the near term. Traders will closely monitor further developments in monetary policy and geopolitical tensions for potential impacts on currency markets.

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