On Friday, most Asian currencies experienced a downturn, with the dollar reaching its highest level in over a week, propelled by hotter-than-anticipated U.S. inflation figures that intensified apprehensions of any hawkish signals from the upcoming Federal Reserve meeting.
Investor anxiety also heightened ahead of central bank meetings in Japan and Australia next week, which are anticipated to potentially provide further hawkish indications to currency markets.
Dollar Strengthens to Over 1-Week High Amid Persistent Inflation Concerns
In Asian trading, both the dollar index and dollar index futures registered a 0.1% increase each, comfortably surpassing the 103 mark following the release of producer price index data for February, which surpassed expectations.
These readings followed the release of consumer price index data earlier in the week, which also indicated a deviation from the Federal Reserve’s 2% annual target for inflation.
As the Fed prepares for its meeting next week, where interest rates are widely expected to remain unchanged, the possibility of a more hawkish stance on rates is now being entertained, particularly given the Fed’s repeated indications that future rate adjustments in 2024 will be heavily influenced by inflation trends.
Traders were observed adjusting their expectations for a potential interest rate cut in June, leading to an increase in expectations for a rate hold, as indicated by the CME Fedwatch tool.
The anticipation of prolonged higher interest rates exerted downward pressure on various Asian currencies.
Yen Steadies as Focus Shifts to BOJ Pivot
On Friday, the Japanese yen remained relatively stable, poised to register a 0.8% decline for the week amid escalating speculation surrounding the upcoming Bank of Japan meeting.
There is widespread anticipation that the central bank will terminate its policies of negative interest rates and yield curve control in the coming months, with analysts divided over whether a decision will be reached in March or April.
The possibility of the BOJ implementing its first interest rate hike in nearly 17 years next week is under consideration, particularly with Japanese inflation persisting in February and recent wage negotiations suggesting significant increases in 2024, both pivotal factors influencing the BOJ’s policy tightening decisions.
Movement in Other Asian Currencies
The Australian dollar depreciated by 0.2%, with the Reserve Bank of Australia expected to maintain its hawkish stance in the upcoming week.
The Chinese yuan experienced a 0.1% decline as the People’s Bank of China opted to leave its medium-term lending rates unchanged, signaling no adjustments to its loan prime rate next week. However, weak house price data indicated ongoing economic pressures in China.
The South Korean won faced a 0.5% decline, influenced by a strengthening U.S. dollar, while the Singapore dollar saw a 0.1% decrease.
The Indian rupee, still reeling from substantial losses on Thursday, traded at 82.9 against the dollar during morning trading.