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Asia FX weakens, dollar rises as markets await more Fed, rate-cut cues

Published 01/15/2024, 11:03 PM
© Reuters

Investing.com-- Most Asian currencies retreated on Tuesday, while the dollar advanced as traders remained largely risk-averse before more cues on when the Federal Reserve could begin cutting interest rates.

Anticipation of key economic readings from China also kept regional markets on edge, while fears of an escalation in the Middle East conflict kept risk appetite dull.

The Japanese yen fell 0.2% and crossed the 146 level to the dollar. Data on Tuesday that showed producer price index inflation remained soft in December, coming just a few days before consumer price index data, which is also expected to show inflation remaining languid.

Softer inflation gives the Bank of Japan less impetus to begin tightening its ultra-dovish policy, which bodes poorly for the yen.

Broader Asian currencies also retreated. The Australian dollar- a key indicator of regional risk appetite- fell 0.5% tracking weakness in commodity prices. Data also showed that Australian consumer sentiment worsened in early-January, amid concerns over high interest rates and inflation.

The South Korean won slid 0.7% as data showed a sustained reduction in export and import prices. The Indian rupee lost 0.1% after data on Monday showed wholesale price index inflation grew less than expected in December.

The Taiwan dollar slid 0.6%, amid increased volatility after the incumbent Democratic Progressive Party secured a third consecutive term in the recent Presidential elections. But the move is expected to invite more ire from China.

Dollar strengthens before econ. data, Fed comments

The dollar index and dollar index futures rose 0.5% and 0.3%, respectively, in Asian trade on Tuesday. The dollar index was also trading at a small premium to futures, indicating increased near-term demand for the greenback.

Traders were now awaiting more cues on the Fed and the U.S. economy, with Fed Governor Christopher Waller set to speak later on Tuesday.

On Wednesday, U.S. retail sales and industrial production readings are set to offer more cues on the world’s largest economy, with any signs of cooling lending more credence to bets on early interest rate cuts.

But markets appeared to have slightly trimmed bets that the Fed will begin cutting rates by as soon as March 2024, according to the CME Fedwatch tool.

Chinese yuan slips, Q4 GDP awaited

The Chinese yuan fell 0.2% to an over one-month low against the dollar, as traders remained largely averse to Chinese assets amid continued concerns over an economic recovery.

Focus was now squarely on fourth-quarter gross domestic product data, due on Wednesday, for more cues on the economy. GDP is expected to have slightly surpassed the government’s 5% annual target for 2023.

But the higher reading is likely to be driven by a lower base for comparison from 2022, as the Chinese economy struggled with reemerging from three years of COVID lockdowns.

The yuan was among the worst-performing Asian currencies in 2023, as a post-COVID economic rebound failed to materialize.

Chinese industrial production and retail sales figures for December are also due on Wednesday.

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