Asia FX softens as Indo-Pak escalation, Fed angst offset US trade talk cheer

Investing.com-- Most Asian currencies weakened on Wednesday as a military escalation between India and Pakistan rattled risk, while the dollar firmed before a Federal Reserve interest rate decision later in the day.

The negative signals largely offset cheer over the U.S. and China signaling that trade talks between the two will begin later in the week. Rate cuts in China also weighed on the yuan. 

The dollar firmed in Asian trade, retaining some recent gains after it recovered from a three-year low. Safe haven flows also aided the greenback, albeit slightly. 

Chinese yuan soft after rate cut; US trade talks loom 

The Chinese yuan weakened on Wednesday, with the USDCNY onshore pair rising 0.1%, while the USDCNH offshore pair rose nearly 0.2%. 

The People’s Bank of China said it will cut its benchmark repurchase rate by 10 basis points to 1.40%, while its reserve requirement ratio will fall by 50 bps to 6.2%. 

The move is aimed at further bolstering the Chinese economy with monetary support, as it grapples with increased headwinds from a trade conflict with the United States. 

But there appeared to be some progress towards Sino-U.S. deescalation, after U.S. and Chinese officials confirmed they will meet for trade talks in Switzerland this week.

U.S. Treasury Secretary Scott Bessent and Trade Representative Jamieson Greer will meet their Chinese counterparts in the coming days. China’s Vice Premier He Lifeng, Beijing’s lead official in U.S.-China trade matters, will meet the two in Switzerland. 

While the move points to some thawing in U.S.-China relations, which are at their worst in years, traders were doubtful whether any immediate deescalation would come from the meeting.

U.S. President Donald Trump also said on Tuesday that he was in no hurry to sign any trade deals, as his administration undertakes trade negotiations over his proposed reciprocal tariffs. 

Indian rupee weakens amid military escalation with Pakistan 

The Indian rupee’s USDINR pair rose 0.3% to around 84.5 rupees on Wednesday, after India said it had carried out strikes against several alleged terrorist targets in Pakistan.

Pakistan decried the attack, and claimed it had retaliated with artillery strikes and by shooting down at least three Indian planes. 

New Delhi said the strikes were in retaliation for a deadly terrorist attack in Indian Kashmir in April.

The military action represents the worst fighting between the two nuclear armed countries in decades, and pushed up concerns over a greater escalation. 

Dollar firms ahead of Fed; Powell in focus

The dollar index and dollar index futures both rose 0.3% in Asian trade, taking some support from news of U.S.-China trade talks.

The greenback was also well-bid before the conclusion of a Fed meeting later in the day, where the central bank is widely expected to keep rates steady.

Fed Chair Jerome Powell is expected to signal few near-term changes to rates, especially in the face of heightened trade tariff uncertainty and sticky inflation. Powell is also expected to brush off repeated calls from Trump to cut interest rates. 

Steady U.S. interest rates are expected to offer some support to the dollar in the near-term, especially as it wallows near three-year lows.

Positioning in the dollar, before the Fed, spurred some weakness in Asian currencies. The Japanese yen’s USDJPY pair rose 0.5%, seeing few near-term safe haven bids, while the Australian dollar’s AUDUSD pair fell 0.2%. 

The South Korean won’s USDKRW pair surged 1.6% in catch-up trade, while the Singapore dollar’s USDSGD pair rose 0.4%. 

The Taiwan dollar- which was a standout performer among Asian currencies in recent sessions- weakened on Wednesday, with the USDTWD pair sliding nearly 1%.