Asian Currency Weakness Amid China Economic Concerns
Most Asian currencies weakened on Friday, while the dollar maintained overnight gains, as signs of ongoing economic weakness in China offset optimism regarding easing U.S. inflation and interest rates.
Purchasing Managers Index (PMI) data from China showed limited improvement in business activity throughout February, signaling a sluggish recovery in Asia’s largest economy. This cautious outlook kept sentiment toward regional currency markets subdued, despite increased expectations of U.S. rate cuts following overnight inflation data.
Chinese Yuan Dips on Contrasting PMI Reports
The Chinese yuan declined by 0.1% on Friday, hovering near recent three-month lows. Official PMI data revealed a continued contraction in China’s manufacturing sector for the fifth consecutive month in February. Although non-manufacturing activity showed some improvement, largely driven by increased consumer spending during the Lunar New Year holiday, concerns persist regarding sustained economic momentum.
While a private survey indicated expansion in China’s manufacturing sector for February, the official reading suggested ongoing challenges for major manufacturing firms due to weak domestic and international demand.
Dollar Strength Despite PCE Data
The dollar index and dollar index futures experienced slight declines in Asian trading on Friday but retained the bulk of their overnight gains. Data indicating a slowdown in inflation, as expected, in January did little to alter the outlook for U.S. interest rates.
Despite the cooling of the Personal Consumption Expenditures (PCE) price index, which is the Federal Reserve’s preferred inflation gauge, inflation remained above the central bank’s target. Analysts at ANZ noted that while a rate cut by the Fed in the summer remains a possibility, strong data through March could prompt a reassessment of rate hike expectations.
Other Asian Currencies and Market Dynamics
Most other Asian currencies remained subdued on Friday. The Japanese yen retraced its gains from Thursday, trading above the 150 level, as expectations of prolonged high U.S. rates outweighed early rate hike speculations by the Bank of Japan.
The Australian dollar saw a 0.3% increase after two consecutive days of losses, with investors betting against further interest rate hikes by the Reserve Bank. Attention was also drawn to upcoming fourth-quarter GDP data.
The Singapore dollar remained flat, while the Indian rupee extended mild gains from Thursday following robust GDP growth in the December quarter, reinforcing India’s position as the fastest-growing major economy.