Investing.com – Most Asian currencies weakened on Thursday as forecasts of smaller interest rate cuts from the Federal Reserve dampened appetite for regional markets, even as the dollar fell on weak inflation readings.
Uncertainty ahead of the Bank of Japan meeting and concerns over trade tensions between the US and China also weighed on sentiment towards Asian currencies.
The Japanese yen has not changed, the Bank of Japan is waiting for new signals
The Japanese yen was little changed after some volatility earlier in the week and traders are now looking for more policy signals on Friday.
The central bank is likely to keep rates steady but is expected to scale back some bond purchases in an attempt to tighten policy.
While tighter monetary conditions are expected to provide some support to the yen, traders were skeptical about how much room the Bank of Japan has to tighten policy given recent signs of economic weakness in Japan.
However, inflation data for May showed some improvement, which may be in line with the Bank of Japan’s forecast that inflation may rise this year.
Dollar Stabilizes as Fed Outlook Offsets Weak CPI
Both indexes rose slightly in Asian trading as traders digested the Fed’s hawkish signals.
Chairman Jerome Powell said the central bank now sees the possibility of just one rate cut this year, down from previous forecasts of three. Some policymakers have even called for no rate cuts this year in the face of persistent inflation.
The Fed also raised its inflation forecast for 2024.
But the Fed’s comments were preceded by inflation, which showed inflation falling slightly more than expected in May. The data hit the dollar and lowered Treasury yields as traders bought into rumors of deflation.
But the dollar stabilized after the Fed’s comments, given that high and longer-term rates are likely to benefit the dollar. Such a scenario also does not bode well for risk-oriented currencies.
Data due later on Thursday is expected to provide more insight into inflation.
Asian currencies generally retreated following this idea. The Chinese yuan rose 0.1% as reports of increased US controls on trade with China dampened sentiment towards the yuan this week.
The South Korean won and Singapore dollar rose 0.3% and 0.2% respectively.
The Australian dollar fell 0.2% even though it was higher than expected in May, giving the Reserve Bank more room to keep rates high for longer.
However, the steady decline in hours worked still indicates some cooling in employment.
The Indian rupee pair remained close to record highs as sentiment towards the currency remained fragile following the shock results of the 2024 general elections.