Asia FX firms past trade tensions, dollar dips after Powell leans dovish

Investing.com-- Asian currencies rose on Wednesday, while the dollar retreated after dovish-leaning comments from Federal Reserve Chair Jerome Powell pushed up bets on more interest rate cuts in the coming months. 

Powell’s comments– which also spurred gains in broader financial markets– helped traders look past simmering trade tensions between the U.S. and China, amid a row over rare earth exports and import restrictions. 

This trend helped the Chinese yuan advance on Wednesday, despite weaker-than-expected inflation data pointing to sustained weakness in the Chinese economy. 

The Japanese yen was an outperformer in the region, as it recovered sharply from steep losses logged through late-September and early-October. Some doubts over fiscal dove Sanae Takaichi’s prime ministership also supported the yen. 

Dollar retreats as Powell flags end to quantitative tightening

The dollar index and dollar index futures fell about 0.2% each in Asian trade, extending some overnight declines. 

Powell on Tuesday said that an end to the Fed’s long-running efforts to shrink its balance sheet, called quantitative tightening, was now in sight. 

While the Fed chair did not specify a timeline, such a move heralds more monetary loosening in the country, with Powell’s comments being viewed as dovish. 

His comments fueled increasing conviction that the Fed will cut rates further in the coming months. Markets are pricing in a 99.6% chance for a 25 basis point cut in end-October, after a similar cut in September, CME Fedwatch showed. 

But the Fed is grappling with a lack of clarity on the U.S. economy, especially as an ongoing government shutdown delayed the release of several key labor and inflation readings for September. The shutdown also weighed on the dollar, as traders fretted over increased risks for the world’s largest economy. 

Still, the prospect of lower U.S. rates lifted broader markets, and helped Asian currencies recoup some recent losses. 

Chinese yuan rises past trade tensions, weak inflation 

The Chinese yuan’s USD/CNY pair fell 0.2% on Wednesday, with the currency also taking support from a substantially stronger midpoint fix by the People’s Bank. 

U.S. trade tensions remained in play after Beijing largely admonished U.S. President Donald Trump’s threat of 100% tariffs on China. The country’s commerce ministry said it was prepared to fight to the end in any trade war. 

Trump on Tuesday kept up his rhetoric against China, threatening to terminate some trade ties with China, including the import of used cooking oil from Beijing. 

Trump’s ire against China is over Beijing introducing tighter controls on its rare earth exports earlier in October. Trump on Tuesday also criticized China’s reluctance to purchase soybean from the United States. 

Chinese inflation data released on Wednesday showed consumer prices shrank more than expected in September, while producer prices marked their third consecutive year of deflation. 

While there were some green shoots in inflation– especially as core consumer inflation hit a 19-month high– there appeared to be few signs of improvement in China’s long-running deflationary trend. 

Beijing is expected to dole out more policy support to shore up growth in the coming months. 

Broader Asian currencies largely advanced against a weaker dollar, while also recovering a measure of recent losses. 

The Japanese yen’s USD/JPY pair fell 0.5%, helped by some unwinding in bets on looser fiscal policy under Takaichi. The Liberal Democratic Party leader now faces a potential challenge to her premiership, after LDP coalition ally Komeito withdrew its support. 

The South Korean won’s USD/KRW pair fell 0.5% after data showed exports and imports rose sharply in September, amid improving trade ties with the United States. 

The Australian dollar’s AUD/USD pair rose 0.5%, while the Singapore dollar’s USD/SGD pair fell 0.2%.

The Indian rupee’s USD/INR pair slid 0.8% and briefly broke below 88 rupees, amid signs of currency market intervention by the Reserve Bank. The rupee was dented by weak Indian inflation data this week, which ramped up bets on more rate cuts by the RBI.