Dollar Strengthens as Asian Currencies Suffer from US Inflation Fears
Asian Currencies Face Steep Losses
Most Asian currencies experienced significant losses on Wednesday following the release of stronger-than-expected U.S. inflation data. The dollar remained near three-month highs, sparking fears that the Federal Reserve would maintain higher interest rates for an extended period.
Japanese Yen Takes a Hit
The Japanese yen was particularly hard-hit by the situation, plummeting past the 150 level against the dollar for the first time since late-November. This was largely due to recent dovish signals from the Bank of Japan, leaving traders wary of the currency’s performance.
BOJ’s Limited Tightening Measures
A senior official from the Bank of Japan hinted at a slow pace of interest rate hikes, signaling limited tightening in the current ultra-loose monetary conditions that have been weighing on the yen in recent months.
Pressure on the Yen
Expectations of prolonged high U.S. interest rates, especially after the latest consumer price index (CPI) reading, continued to put pressure on the yen.
Impact on Dollar and Euro
The dollar and euro both saw a 0.1% decline in Asian trade but remained close to their three-month highs.
U.S. Inflation Data’s Effect on Rates
The U.S. dollar surged after the inflation data revealed that inflation remained higher than anticipated in January. This led to a reevaluation of rate cut expectations and saw traders scaling back bets on early rate cuts even further.
Implications for Asian Currencies
Higher U.S. rates for a longer duration spell trouble for risk-heavy, high-yielding Asian currencies, as the gap between risky and low-risk yields narrows. U.S. Treasury yields also surged following the inflation reading.
Overall Picture for Asian Currencies
Asian currencies remained relatively stable on Wednesday after registering significant losses in the previous session. The Indian rupee and Indonesian rupiah experienced some recovery but were still far from their best performance.
The Chinese yuan and Thai baht also showed signs of weakness, while the South Korean won and Singapore dollar hovered near their three-month lows.
The Australian dollar remained firm in offshore trade but stayed within sight of a three-month low. Meanwhile, the Indian rupee weakened past the 83 level once again and was close to a record low hit in 2023.
