Most Asian currencies declined on Friday, while the dollar reached its highest point in over a week due to hotter-than-expected U.S. inflation figures, sparking concerns about potential hawkish signals from the upcoming Federal Reserve meeting. Market participants were also nervous ahead of central bank meetings in Japan and Australia next week, which could signal tightening monetary policies.
The dollar index and dollar index futures both rose by 0.1% in Asian trading, comfortably staying above the 103 level following stronger-than-anticipated producer price index data for February.
This followed a similar trend earlier in the week with consumer price index data, indicating inflation moving further away from the Federal Reserve's 2% annual target.
These inflationary pressures occurred just before the Fed meeting, where interest rates are expected to remain unchanged. However, the Fed may adopt a more hawkish stance on rates, given its repeated emphasis that any future rate adjustments will be heavily influenced by inflation trends.
Traders adjusted their expectations accordingly, reducing the likelihood of an interest rate cut in June and increasing expectations for a status quo, according to the CME Fedwatch tool.
The prospect of prolonged higher interest rates weighed on Asian currencies broadly. The Japanese yen remained relatively stable on Friday but was on track to decline by 0.8% for the week amid speculation surrounding the upcoming Bank of Japan meeting.
There is widespread anticipation that the BOJ will gradually move away from its negative interest rate and yield curve control policies in the coming months, with uncertainty whether a decision will be reached in March or April. With Japanese inflation remaining persistent and wage negotiations suggesting significant increases in 2024, the BOJ might contemplate its first interest rate hike in nearly 17 years, a pivotal factor in tightening its policy.
In addition, the Australian dollar fell by 0.2% as the Reserve Bank of Australia is expected to maintain its hawkish stance in the upcoming week. The Chinese yuan depreciated by 0.1% after the People’s Bank of China refrained from altering its medium-term lending rates, signaling no imminent adjustments to its loan prime rate. However, weak house price data indicated ongoing economic pressures in China.
The South Korean won declined by 0.5% against a strengthening U.S. dollar, while the Singapore dollar edged down by 0.1%. Lastly, the Indian rupee struggled to recover from significant losses on Thursday, trading at 82.9 against the dollar during morning trading.
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