Most Asian currencies stabilized on Wednesday, with the Japanese yen weakening slightly after a strong rally earlier in the week. Meanwhile, continued expectations of U.S. interest rate cuts kept the dollar near seven-month lows.
The yen’s strength has signaled a continued unwinding of the carry trade, a trend that poses challenges for risk-sensitive markets across Asia. However, regional currencies benefited from the dollar’s weakness, as traders maintained a largely bearish outlook on the greenback, fueled by growing anticipation of a rate cut by the Federal Reserve in September.
Japanese Yen Softens After Strong Rally, Carry Trade Unwinds
The Japanese yen slightly weakened, with the USD/JPY pair rising by 0.2%. Earlier this week, the pair had seen a sharp decline, hovering around the 145-yen level, well below the highs of 160 yen reached earlier this year.
The USD/JPY had previously fallen to as low as 141 yen in early August, driven by the unwinding of the yen carry trade in response to hawkish signals from the Bank of Japan. The prospect of rising Japanese interest rates is expected to support the yen further, potentially continuing to disrupt the carry trade in the months ahead.
Analysts at Jefferies predicted that the USD/JPY pair would likely stabilize around 145 yen but could drop to as low as 120 yen if the carry trade unwinds further.
Data released earlier on Wednesday indicated that Japan’s exports grew less than expected in July, while imports saw a significant increase.
Dollar at Seven-Month Low as Rate Cut Expectations Grow
The dollar index and dollar index futures showed little movement during Asian trading hours, after hitting their lowest levels since early January on Tuesday. The dollar was under pressure due to rising bets that the Federal Reserve would cut interest rates in September. Market sentiment was divided on whether the cut would be 25 or 50 basis points, according to CME Fedwatch.
Federal Reserve Chair Jerome Powell is expected to provide more insight into the central bank’s rate cut plans during his address at the Jackson Hole Symposium on Friday, although he is not expected to offer any explicit guidance on a cut.
Broader Asian Currencies Drift Lower
Broader Asian currencies drifted lower as markets weighed the impact of a potential unwinding of the carry trade against the prospect of lower U.S. interest rates.
The Chinese yuan’s USD/CNY pair remained steady around 7.1328 yuan after a slightly stronger midpoint fix by the People’s Bank of China. The central bank had also kept its benchmark loan prime rate unchanged on Tuesday.
The South Korean won’s USD/KRW pair rose by 0.5%, while the Singapore dollar’s USD/SGD pair remained flat.
The Australian dollar’s AUD/USD pair increased by 0.1% following the release of the Reserve Bank of Australia’s August meeting minutes, which indicated that the central bank was still considering a rate hike amid persistent inflation.
The Indian rupee’s USD/INR pair also rose by 0.1%, staying close to recent record highs.
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