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Asia FX Gains as Dollar Nears 2-Month Low on Rate Cut Bets

Most Asian currencies strengthened on Thursday, tracking weakness in the dollar as soft labor data continued to fuel expectations of rate cuts by the Federal Reserve in the coming months.

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The dollar remained close to a two-month low, with both the dollar index and dollar index futures falling about 0.2% in Asian trade. The softness in the greenback followed weak ADP employment data, indicating further cooling in the U.S. labor market.

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Traders increased bets on a 25 basis points rate cut by the Fed in September, boosting sentiment in most Asian currencies. The USD/JPY pair fell 0.3%, remaining below recent peaks. The Bank of Japan is expected to potentially tighten policy in its upcoming meeting next week.

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The Australian dollar’s AUD/USD pair rose nearly 0.3%, despite a sharp decline in trade data for April. The country’s trade surplus widened, providing some support to the currency.

Although the Chinese yuan’s USD/CNY pair fell marginally, it remained close to six-month highs reached in May. Sentiment towards China turned cautious as traders awaited more clarity on the country’s economic growth plans, with key trade data expected this week.

The Singapore dollar’s USD/SGD pair dropped 0.2%, while the South Korean won’s USD/KRW pair declined 0.1% in holiday trade.

Meanwhile, the Indian rupee’s USD/INR pair remained near record highs of over 83 rupees on Thursday. The currency experienced significant volatility following the results of the 2024 general elections, where the incumbent BJP-led alliance secured a smaller majority than expected. This outcome raised concerns about the government’s ability to implement economic reforms effectively under Prime Minister Narendra Modi’s leadership in his third term.

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