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Asia FX weakens as rate fears boost dollar; yuan at weakest in 6 months

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Most Asian currencies weakened on Wednesday, with the Chinese yuan touching its lowest level in six months due to persistent fears of high U.S. interest rates, which kept traders favoring the dollar.

Sentiment towards risk-driven regional markets remained weak, especially as hawkish comments from the Federal Reserve continued to emerge. Concerns over sluggish regional economic growth also weighed heavily.

The dollar index and dollar index futures both rose 0.1% in Asian trade, extending overnight gains after Minneapolis Fed President Neel Kashkari said that policymakers had not ruled out more rate hikes to combat inflation.

His comments come just days before the closely-watched PCE price index data, which is the Fed’s preferred inflation gauge.

Chinese Yuan Weakens, USDCNY at 6-Month High

The Chinese yuan weakened, as a soft midpoint fix by the People’s Bank of China saw the USDCNY pair reach its highest point since mid-November.

The PBOC has so far maintained a tight grip on the yuan to stem its weakness, but now appeared to be slightly loosening that grip amid sustained selling pressure and ongoing weakness in the Chinese economy.

Beijing continued to roll out supportive measures for the property market, fostering some optimism. However, traders remained doubtful about how Beijing planned to fund and execute its stimulus measures for the property sector, which has been in a slump for over three years.

Japanese Yen Weakens, BOJ Comments Offer Mixed Signals

The Japanese yen weakened further on Wednesday, with the USDJPY pair rising past 157 yen to the dollar.

The currency found little support from mixed comments from Bank of Japan officials.

BOJ member Adachi Seiji warned that the central bank could tighten policy hastily if yen weakness impacted inflation. He also forecast that inflation would increase in the summer-autumn period.

However, Seiji emphasized that the BOJ needed to be cautious in tightening policy and that it would remain accommodative in the near term to support the Japanese economy.

Australian Dollar Shows Limited Strength Despite Hot CPI

The Australian dollar saw limited strength on Wednesday, with the AUDUSD pair rising marginally even as consumer price index inflation grew more than expected in April.

The reading ramped up expectations that the Reserve Bank of Australia will have to keep rates high for longer, or even hike them further this year, to bring down inflation.

While such a scenario bodes well for the Aussie, this optimism was countered by strength in the dollar and concerns over slowing economic growth in Australia.

Broader Asian Currencies Weaken

Broader Asian currencies also weakened. The South Korean won’s USDKRW pair rose 0.2%, while the Singapore dollar’s USDSGD pair added 0.1%.

The Indian rupee’s USDINR pair rose 0.1% and appeared to be moving back towards record highs hit in May, above 83 rupees to the dollar.

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