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Asia FX muted, dollar steadies ahead of inflation, Fed test

Published 01/25/2024, 11:13 PM
Updated 01/25/2024, 11:13 PM
© Reuters. Most Asian currencies kept to a tight range on Friday, while the dollar steadied after an overnight bounce following strong economic growth data, with a key inflation reading and a Federal Reserve meeting now in focus.

Regional currencies were nursing a muted performance for the week, amid renewed pressure from the dollar as markets began steadily pricing out expectations of early interest rate cuts by the Fed.

Signs of resilience in the U.S. economy further boosted the greenback on Thursday, as fourth-quarter gross domestic product data grew more than expected.

The dollar index and dollar index futures both fell 0.1% in Asian trade. Markets were now awaiting PCE price index data- the Fed’s preferred inflation gauge- due later in the day, for more cues on the bank’s plans to cut rates.

The data comes just a few days before the Fed’s first meeting in 2024, where the central bank is widely expected to keep rates on hold. But any signals on planned rate cuts this year will be in close focus.

Asian currencies were nursing a weak start to 2024 on growing doubts over early rate cuts by the Fed. But they saw some support this week as China rolled out more stimulus measures, ramping up hopes for a recovery in the region’s largest economy.

Chinese yuan supported by PBOC, PMIs in focus

The Chinese yuan fell 0.1% on Friday, but was set for mild weekly gains amid consistent support from the People’s Bank of China. While more monetary stimulus bodes well for the economy, it also presents more headwinds for the yuan, especially as the PBOC flushes the Chinese economy with more currency.

To counter this, the PBOC was seen rolling out a string of stronger midpoints this week, while also potentially buying yuan off the open market to support the currency.

While the bank’s reserve requirement ratio cut inspired some optimism over China, analysts still questioned just how much support more liquidity will provide, given that consumer and business spending in the country remains weak.

Focus is now on key purchasing managers index data due next week for more cues on the Chinese economy.

Broader Asian currencies kept to a tight range. The Japanese yen was flat as data showed consumer price index inflation in Tokyo fell more than expected in January, heralding a similar trend in countrywide inflation.

The data comes just a few days after the Bank of Japan signaled more progress towards inflation meeting its 2% annual target, which will allow the bank to begin tightening its ultra-loose policy later this year. This notion spurred some strength in the yen.

The South Korean won rose 0.1% on Friday, while the Singapore dollar was flat.

Regional trading volumes were also held back by holidays in Australia and India. But the Australian dollar firmed slightly in offshore trade.

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