Investing.com — Most Asian currencies fell on Thursday, as expectations of smaller interest rate cuts by the Federal Reserve dampened appetite for regional markets, even as the dollar fell amid a weak inflation reading.
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 stabilized, and the Bank of Japan awaits further signals
The Japanese Yen pair moved slightly after seeing some volatility earlier in the week, with traders now awaiting further signals on policy on Friday.
The central bank is likely to keep interest rates steady, but is expected to reduce some of its bond purchases in an attempt to tighten policy.
While tight monetary conditions are expected to provide some support to the yen, traders were skeptical about how much freedom the Bank of Japan has to tighten policy, in light of recent signs of economic weakness in Japan.
However, inflation data for May showed some improvement, which may be linked to the Bank of Japan's expectations for an eventual inflation rebound this year.
The dollar stabilized as Fed forecasts offset weak CPI
Both the greenback and the greenback rose slightly in Asian trading, as traders digested hawkish signals from the Federal Reserve.
Bank President Jerome Powell said that the central bank now only sees the possibility of cutting interest rates once this year, down from the previous expectation of three. Some policymakers have even called for no interest rate cuts this year in the face of persistent inflation.
The Fed also raised its inflation forecasts for 2024.
But the Fed's comments were preceded by inflation data that showed inflation slowed slightly more than expected in May. The reading hit the dollar and pushed Treasury yields lower, as traders embraced the narrative of declining inflation.
But the dollar stabilized after the Federal Reserve's comments, keeping in mind that higher interest rates for a longer period would likely benefit the US currency. Such a scenario also does not bode well for risk-driven currencies.
Data scheduled for release later on Thursday are expected to provide further signals on inflation.
Broader Asian currencies mostly fell following this idea. The Chinese yuan pair rose 0.1%, as reports of further US trade scrutiny against China dampened sentiment towards the yuan this week.
The South Korean won and the Singapore dollar rose 0.3% and 0.2%, respectively.
The Australian dollar fell 0.2% even with a stronger than expected reading for May, giving the Reserve Bank more room to keep interest rates high for longer.
But the continued decline in working hours still indicates some slowdown in hiring.
The Indian Rupee pair remained close to its record highs, as sentiment towards the currency remained fragile following the shock result in the 2024 general elections.