Feb 22 2024: On Thursday, most Asian currencies experienced a decline, while the dollar stabilized following recent losses, as indications from the Federal Reserve suggested that the central bank is inclined to maintain high interest rates in the short term.
The weakening purchasing managers index (PMI) readings from both Australia and Japan further bolstered the preference for the dollar among Asian traders, as business activity in these countries slowed down throughout February.
After a sharp decline from its three-month highs earlier this week, both the dollar index and dollar index futures stabilized in Asian trading, indicating limited potential for further downturns in the greenback.
The release of minutes from the Fed’s late-January meeting revealed the central bank’s reluctance to reduce interest rates in the near term. Moreover, speeches from several Fed officials reiterated this hawkish stance, citing concerns over persistent inflation.
As a result, traders progressively adjusted their expectations for rate cuts in May and possibly June, posing challenges for Asian currencies due to the narrow gap between risky and low-risk yields.
This sentiment led to a weaker trend for most Asian currencies on Thursday, with the Chinese yuan depreciating by 0.1% and approaching the 7.2 level amidst investor skepticism regarding an economic rebound in China.
Despite signs of government intervention in currency markets, more substantial losses in the yuan were curbed.
The Japanese yen weakened by 0.1% and surpassed the 150 level against the dollar, reflecting the anticipation of sustained disparities between local and U.S. yields. Additionally, disappointing PMI data weighed on the yen, indicating a further contraction in manufacturing activity and deteriorating growth in services in February.
Meanwhile, the Australian dollar remained stagnant as preliminary PMI data for February revealed ongoing weakness in business activity. However, Wednesday’s release of stronger-than-expected wage price index data increased the likelihood of the Reserve Bank of Australia maintaining higher interest rates for an extended period.
Other Asian currencies exhibited minimal movement, with the Singapore dollar remaining stable and the South Korean won edging up by 0.2% after the Bank of Korea’s decision to maintain interest rates unchanged, signaling no immediate intentions to initiate monetary policy loosening.
The Indian rupee hovered just below the 83 level against the dollar, with the awaited release of Indian services PMI later in the day.
