Most Asian currencies were steady on Wednesday with the Japanese yen slightly weaker after a strong rally earlier this week, while continued bets on a U.S. interest rate cut saw the dollar fall to seven-month lows.
The strength in the yen pointed to a sustained decline in the carry trade – a trend that bodes ill for risk-on markets in Asia.
But regional currencies benefited from the dollar’s weakness, with traders remaining largely bearish on the greenback as expectations of a September interest rate cut grow.
Japanese yen retreats after strong rise, carry trade collapses
The Japanese yen fell slightly after a strong rally this week, with the pair rising 0.2%.
But the pair fell sharply earlier this week and hovered around the 145 yen level, remaining well below the 160 yen highs hit earlier this year.
The USD/JPY pair fell to 141 earlier in August as the yen carry trade largely weakened due to hawkish signals from the Bank of Japan. Higher Japanese interest rates are expected to support the yen and undermine the yen carry trade in the coming months.
Analysts at Jefferies said the USD/JPY pair is likely to stabilize at around 145 yen, but could fall to 120 yen if carry trade unwinds continue.
Japan’s economy grew less than expected in July, although it rebounded sharply, data released earlier on Wednesday showed.
Dollar at 7-month low as markets focus on Powell comments, rate cut
Gold was little moved in Asian trading, after falling to its lowest level since early January on Tuesday.
The dollar was pressured by growing bets that the Federal Reserve will cut interest rates in September. Markets were divided over whether to cut rates by 25 or 50 basis points next month, data showed.
Federal Reserve Chairman Jerome Powell’s speech at the Jackson Hole symposium on Friday is expected to provide further clues about the central bank’s plans to cut interest rates, although Powell is not expected to give any explicit signals about a cut.
Broader Asian currencies fell as markets weighed the prospect of a carry trade easing against expectations of lower U.S. interest rates.
The Chinese yuan pair was steady at 7.1328 yuan after the People’s Bank of China kept its benchmark lending rate unchanged on Tuesday.
The South Korean won rose 0.5%, while the Singapore dollar remained flat.
The Australian dollar rose 0.1% after minutes from the Federal Reserve’s August meeting showed the central bank was still considering raising interest rates amid stagnant inflation.
The Indian rupee rose 0.1% and remained close to its recent record highs.