Investing.com — Most Asian currencies fell on Friday and suffered sharp losses against the dollar, as hawkish signals on inflation and interest rates led traders to price in expectations of interest rate cuts in 2024.
Sentiment towards Asian markets was also shaken by signs of a renewed trade war between the US and China, while the Chinese People's Liberation Army was seen conducting expanded military exercises near Taiwan, escalating tensions with Taipei.
The dollar is at a 10-day high as bets on a September interest rate cut decline
But the biggest source of pressure on Asian currencies was the dollar's recovery, with the dollar holding at a 10-day high on Friday.
The minutes of the Federal Reserve's late April meeting, along with several hawkish comments from Fed officials, have increased investors' concern about persistent inflation, which in turn could delay any plans by the central bank to start cutting interest rates.
This has led traders to greatly exceed their expectations for a rate cut in September.
The traders shown were pricing in roughly equal probability of a cut and a hold — about 46% — in September. Previous forecasts showed a probability of more than 50% for a reduction.
The Japanese yen is weakening, and a weak CPI offers little relief
The Japanese Yen pair rose 0.1% on Friday to reach the highest level in more than three weeks, continuing its recovery from the lows recorded in the wake of government intervention seen earlier in May.
The yen received little relief from data showing inflation fell as expected in April, as spending remained weak. The reading raised further questions about how much progress the Bank of Japan has to tighten policy further, presenting further headwinds for the yen.
The Chinese yuan's losses are limited due to the strong reform of the People's Bank of China
The Chinese yuan pair rose 0.05% on Friday, with further weakness in the yuan caped by a much stronger mid-term reform from the People's Bank of China.
The stronger reform came amid the simmering trade war with the United States, doubts about further stimulus measures and rising tensions with Taiwan, leading to a wave of yuan selling pressure.
The USDCNY pair was close to a six-month high.
Broader Asian currencies fell. The South Korean won pair rose 0.3%, while the Singapore dollar pair rose 0.1%.
The Australian dollar pair fell by 0.2%. Most regional currencies were heading towards sharp weekly losses as the possibility of US interest rates rising for a longer period represents further pressure.
