Apr 19 2024: On Friday, most Asian currencies faced weakening pressures, while the dollar and Japanese yen found support due to safe haven demand following reports of Israel’s retaliatory strikes against Iran.
The continued warnings from Federal Reserve officials about prolonged higher U.S. interest rates contributed to the subdued sentiment towards regional currencies, resulting in significant losses for many Asian currencies over the week.
Safe Haven Demand Boosts Dollar and Yen
The dollar index and dollar index futures edged up in Asian trading, staying close to the five-month highs reached earlier this week. The USDJPY pair, representing the Japanese yen, dipped 0.2% but remained near 34-year highs seen recently.
Reports of Israel’s drone strikes in several areas, including near Iranian nuclear facilities, prompted safe haven flows into the dollar and yen. While initial assessments indicated no damage to these facilities, the situation signals a potential escalation in the Iran-Israel conflict, fueling safe haven demand for these currencies and dampening risk appetite.
Impact on Asian Currencies
The Australian dollar, often viewed as an indicator of risk sentiment in Asia, weakened with the AUDUSD pair dropping 0.3% to a five-month low. Similarly, the South Korean won’s USDKRW pair rose by 0.4%, and the Singapore dollar’s USDSGD pair increased by 0.1%.
The Indian rupee remained under pressure, with the USDINR pair hovering near record highs above 83.5.
Hawkish Fed Comments Add Pressure
The hawkish comments from Fed officials about persistently high inflation and the potential for longer-term interest rate hikes weighed on sentiment across Asia. Atlanta Fed President Raphael Bostic even mentioned the possibility of rate hikes if inflation remains stubborn.
Strong U.S. economic data reinforced expectations of prolonged higher interest rates, leading traders to recalibrate expectations, with many pricing out the possibility of a June interest rate cut.