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Asia FX rises as dollar pulls back ahead of CPI report; yen fragile

Published 11/01/2024, 05:34
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Investing.com-- Most Asian currencies rose slightly on Thursday, while the dollar trimmed a bulk of its new year gains in anticipation of key U.S. inflation data for more cues on when the Federal Reserve could begin cutting interest rates.

But the Japanese yen hovered near one-month lows, seeing fresh weakness on growing conviction that the Bank of Japan will delay a pivot away from its ultra-dovish policy.

Dollar retreats, CPI data awaited for more rate-cut cues

The dollar index and dollar index futures both fell 0.1% in Asian trade, extending overnight losses as traders maintained bets that the Fed will enact steep interest rate cuts this year.

Consumer price index (CPI) inflation data due later on Thursday is widely expected to factor into expectations for interest rate cuts this year. Headline inflation is expected to rise slightly, while core CPI is expected to fall further.

But inflation is still expected to remain well above the Fed’s annual 2% target- a trend that could potentially see the central bank keep policy tighter for longer.

While traders somewhat scaled back bets on early interest rate cuts by the Fed, general consensus still remained on at least 100 to 150 basis points of cuts in 2024.

The CME Fedwatch tool showed traders pricing in a 65% chance of a 25 bps cut in March- up from 60.8% seen a day earlier and 64.7% seen last week.

Lower U.S. interest rates bode well for Asian markets, given that they free up more capital for investment into the region. Most regional currencies advanced on that notion.

The Australian dollar rose 0.3%, cheered by data that showed a substantially bigger-than-expected jump in the country’s trade balance in November. But the increase was also driven chiefly by a sharp month-on-month decline in imports, as Australian consumer demand worsened.

The Chinese yuan rose 0.1%, recovering slightly from a weak start to 2024. Sentiment towards China remained weak amid a sluggish economic rebound, with inflation and trade data due on Friday expected to show little improvement.

The South Korean won rose 0.2% as the Bank of Korea kept interest rates steady as expected, but signaled that rates were likely to remain higher for longer.

The Singapore dollar was flat, while the Indian rupee broke below the 83 level for the first time in nearly one month. Indian CPI data is also due on Friday.

Japanese yen lags on dovish BOJ bets

The Japanese yen saw some strength on Thursday, but was nursing steep losses so far in 2024 amid growing conviction that the Bank of Japan will delay a pivot away from its ultra-dovish policies.

While this trend spurred sharp gains in Japanese stocks, the yen was battered by the prospect of Japanese interest rates remaining in negative territory- which had severely battered the yen over the past two years. The currency was among the worst-performing Asian units over the past two years.

The yen traded at 145.44 to the dollar, and was close to its weakest level in a month. The BOJ is set to meet later in January, and is widely expected to maintain its ultra-dovish course in the face of increased stimulus measures after a devastating earthquake in central Japan.

Soft inflation and wage growth also gave further credence to bets on a dovish BOJ.

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