July 19 2024: Most Asian currencies weakened on Friday, as fears of escalating trade tensions between the U.S. and China dented sentiment, favoring the dollar as a safe-haven asset even as expectations of interest rate cuts persisted.
Dollar Strength
The dollar index and dollar index futures each recovered some of their recent losses, rising 0.1% in Asian trade and putting them on track for their first weekly gain in three weeks. Gains on Thursday and Friday saw the greenback rebound from near four-month lows, as markets continued to bet that the Federal Reserve will start cutting interest rates from September.
This sentiment had bolstered Asian currencies in recent sessions. However, they pulled back on Friday amid concerns over worsening U.S.-China relations and uncertainty surrounding the U.S. presidential race, with growing calls for President Joe Biden to drop his reelection bid also weighing on risk appetite.
Chinese Yuan Near 8-Month Lows
The Chinese yuan weakened, with the USDCNY pair approaching levels last seen in November 2023. The yuan was hit by reports that the U.S. was considering stricter trade sanctions on China’s technology and chipmaking sectors, potentially prompting retaliatory measures from Beijing.
Additionally, weaker-than-expected economic growth data for China in the second quarter further pressured the yuan. The Third Plenum of the Chinese Communist Party is now in focus, with top officials promising more growth-supportive measures but providing no specific details.
Japanese Yen Weakens Post-Intervention Speculation
The Japanese yen also weakened on Friday, reversing some of the sharp gains it made against the dollar earlier in the week. The USDJPY pair rose past 157 yen, after dipping to around 155 yen earlier. The yen’s appreciation had sparked speculation of government intervention in currency markets, though officials provided little confirmation.
Japanese consumer price index (CPI) inflation for June was softer than expected, increasing uncertainty over whether the Bank of Japan (BOJ) will have enough justification to hike interest rates further at its meeting later this month. Some analysts expect a 10 basis point hike from the BOJ.
Broader Asian Currency Weakness
Broadly, Asian currencies weakened as risk appetite remained subdued. The South Korean won’s USDKRW pair rose 0.2%, while the Singapore dollar’s USDSGD pair increased by 0.1%.
The Australian dollar’s AUDUSD pair fell slightly, and the Indian rupee’s USDINR pair hit a record high above 83.7 rupees. India’s persistent trade deficit has been a significant weight on the rupee, offering little support despite ongoing optimism over the Indian economy.