Most Asian currencies traded within a narrow range on Thursday, while the U.S. dollar strengthened after a robust U.S. consumer inflation report dampened expectations for significant Federal Reserve interest rate cuts.
Japan’s yen weakened further due to soft inflation data, moving off its eight-month highs. Despite this, the yen remained relatively strong as hawkish remarks from the Bank of Japan (BOJ) continued to surface.
Excluding the yen, most regional currencies were still grappling with losses from the previous week, as concerns over a potential U.S. recession weighed on risk-sensitive markets.
Dollar Strengthens as Core CPI Surpasses Expectations, Weakening Rate Cut Prospects
Both the dollar index and dollar index futures edged up by 0.1% in Asian trade, building on Wednesday’s gains after core consumer price index (CPI) inflation for August exceeded expectations.
While overall CPI inflation moderated, the higher core inflation reading suggested that inflation might be more persistent than anticipated, prompting the Fed to consider smaller rate cuts.
Market expectations shifted significantly, with most traders now anticipating a 25-basis-point cut from the Fed next week, while the likelihood of a 50 bps cut more than halved, according to the CME FedWatch tool.
Attention now turns to producer price index (PPI) inflation data, expected later on Thursday, for further insights into inflationary trends ahead of the Fed’s decision.
A more modest rate-cutting scenario is seen as unfavorable for Asian markets, as it signals tighter U.S. monetary conditions for an extended period.
Yen Weakens From 8-Month Highs After Soft PPI Data
The Japanese yen retreated from its eight-month high, with the USD/JPY pair rising 0.1% to 142.47 yen. This decline extended overnight losses after Japan’s producer price index inflation came in weaker than expected for August.
The softer inflation reading raised doubts about how much room the BOJ has to continue raising interest rates, despite its signals of further hikes amid rising inflation.
BOJ board member Naoki Tamura reiterated on Thursday that interest rates needed to increase to at least 1% to mitigate inflation risks. The central bank will meet next week, though analysts remain uncertain about another rate hike following July’s increase. Consumer inflation data, also due next week, will likely provide further guidance.
Broader Asian Currencies Trade Flat Amid Uncertainty Over U.S. Rates
Other Asian currencies remained largely unchanged amid uncertainty surrounding U.S. interest rate policy and a lack of significant local developments.
The Australian dollar (AUD/USD) rose 0.1%, while the South Korean won (USD/KRW) and Singapore dollar (USD/SGD) were both flat.
China’s yuan (USD/CNY) remained steady, nursing losses from earlier in the week. Weak import data and reports of potential new U.S. trade restrictions against Beijing dampened sentiment toward the yuan.
The Indian rupee (USD/INR) also traded flat, hovering near the 84 rupee level.
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