Asia FX Remains Subdued, Dollar Holds Steady Amid Strong Inflation Impact

Most Asian currencies maintained narrow ranges on Monday, while the dollar stabilized near three-month highs following indications of persistent U.S. inflation that tempered expectations of early interest rate cuts.

The dollar index and dollar index futures lingered near the three-month highs in Asian trade, fueled by higher-than-expected producer price index inflation data released for January. This data, coupled with a robust consumer price index reading, raised concerns that stubborn inflation might deter the Federal Reserve from early interest rate cuts in 2024. Consequently, traders are now pricing in the possibility of a U.S. rate cut only by June, signaling potential challenges for Asian currencies.

In China, markets cautiously resumed trade as traders awaited confirmation of whether the spending boost observed during the week-long Lunar New Year holiday would persist in the coming weeks. The yuan saw a 0.1% decline, remaining close to a three-month low, with limited losses due to a strong daily midpoint fix from the People’s Bank of China. The central bank is widely expected to maintain its benchmark loan prime rate unchanged on Tuesday, holding it at record lows.

Other Asian currencies largely remained within a flat-to-low range. The Singapore dollar showed minimal movement, while the South Korean won experienced a 0.3% decline. The Australian dollar, on the other hand, rose by 0.1% in anticipation of the Reserve Bank of Australia’s meeting minutes, scheduled for Tuesday. During the meeting, the RBA had signaled the possibility of further interest rate hikes, bolstering the Aussie.

The Indian rupee remained stable around the 83 level against the dollar, while the Thai baht surged despite data indicating lower-than-expected economic growth in the fourth quarter.

The Japanese yen hovered around the 150 level to the dollar, with traders cautious about potential government intervention in currency markets. The yen had experienced a decline to three-month lows in the past week amid growing expectations that the Bank of Japan would be slow to tighten its ultra-loose monetary policy. Concerns about higher U.S. interest rates also weighed on the yen. The 150 level is a crucial psychological point for the yen, as sustained breaches beyond 150 have historically prompted strong measures from the Japanese government. Top-level ministers had issued verbal warnings to currency markets last week following the yen’s latest decline.

Recent data revealed an unexpected entry into a recession for the Japanese economy in the fourth quarter of 2023.