Mar 15 2024: On Friday, most Asian currencies experienced declines, while the dollar reached an over one-week high due to hotter-than-expected U.S. inflation data, raising concerns about potential hawkish signals from the upcoming Federal Reserve meeting.
Investors were cautious ahead of central bank meetings in Japan and Australia next week, anticipating possible hawkish signals that could impact currency markets.
The dollar index and dollar index futures rose by 0.1% each in Asian trading, remaining above the 103 level following stronger-than-expected producer price index data for February. This data, along with earlier robust consumer price index figures, indicated a further deviation from the Federal Reserve’s 2% annual inflation target.
The higher inflation readings just before the Fed meeting prompted speculation about a potential shift to a more hawkish stance on interest rates, as the Fed has indicated that rate adjustments in 2024 will be influenced by inflation trends.
Traders adjusted their expectations, reducing the likelihood of an interest rate cut in June and increasing expectations for a rate hold, according to the CME Fedwatch tool.
The prospect of prolonged higher interest rates weighed on Asian currencies broadly.
Meanwhile, the Japanese yen remained relatively stable on Friday but was on track to decline by 0.8% for the week amid speculation about the Bank of Japan’s upcoming meeting. The BOJ is expected to phase out its negative interest rate and yield curve control policies soon, with debates over whether this decision will come in March or April.
There’s a possibility that the BOJ could raise interest rates for the first time in nearly 17 years next week, especially considering the persistence of Japanese inflation in February and indications of significant wage increases in 2024, both factors crucial for the BOJ’s policy tightening.
Other Asian currencies also faced downward pressure, with the Australian dollar falling by 0.2% ahead of the Reserve Bank of Australia’s expected maintenance of a hawkish stance next week.
The Chinese yuan declined by 0.1% as the People’s Bank of China left its medium-term lending rates unchanged, signaling no adjustments to its loan prime rate in the upcoming week. However, weak house prices data indicated ongoing economic challenges in China.
The South Korean won and the Singapore dollar also experienced declines, while the Indian rupee continued to grapple with significant losses from Thursday, trading at 82.9 to the dollar in morning trade.