Forex
Asia FX muted, dollar steadies with nonfarm payrolls on tap
Investing.com– Most Asian currencies moved in a tight range on Friday as growing risk-aversion in global financial markets sparked some safe haven flows into the dollar, while markets awaited key nonfarm payrolls data for more cues.
The Japanese yen, however, remained steady after a hawkish Bank of Japan sparked a rally in the currency this week, putting it at its strongest levels since late-March. The currency also saw some safe haven bids as a global carry trade continued to come undone.
While global stock markets logged steep losses on concerns over slowing economic growth, losses in foreign exchange markets were limited by the prospect of U.S. interest rate cuts in the coming months. This notion also limited any strength in the dollar.
Yen steady, USDJPY tests 148 on hawkish BOJ
The Japanese yen steadied after a strong rally on Friday, with the pair hovering around 149.50 yen. The pair had fallen as low as 148.88 yen earlier in the day.
The yen surged this week after the BOJ and flagged more potential hikes in 2024, citing some improving trends in the Japanese economy.
Data on Friday showed Japan’s – the change in the total amount of yen in circulation- increased more than expected in July, heralding an uptick in inflation over the coming months.
The BOJ said that inflation was likely to pick up on higher domestic wages- which presents a more hawkish outlook for the central bank this year.
Dollar recovers some losses, nonfarm payrolls on tap
The and steadied in Asian trade after rebounding in overnight trade, as the greenback benefited from safe haven demand.
The dollar was nursing some losses from earlier in the week after the Federal Reserve flagged the possibility of an interest rate cut in September.
Weak economic data furthered bets on a September rate cut, as data showed an outsized contraction in manufacturing activity in June.
Focus was now squarely on upcoming data for more cues on the economy, with any more signs of a cooling labor market likely to further expectations for a rate cut.
Broader Asian currencies moved in a tight range. The Chinese yuan’s pair steadied after logging wild swings this week, although sentiment towards China remained negative as weak PMI data fueled increased concerns over an economic slowdown.
The Australian dollar’s pair rose slightly before a , with soft consumer price index data spurring bets that the central bank will keep interest rates unchanged until at least next year.
But data for the second quarter read slightly higher.
The South Korean won’s pair rose 0.2% despite a slightly stronger-than-expected for July, while the Singapore dollar’s pair was flat.
The Indian rupee’s pair moved little and remained in sight of record highs.
Investing.com– The Japanese yen exhibited minimal movement on Tuesday, despite Bank of Japan (BOJ) Deputy Governor Ryozo Himino indicating a potential hike in the upcoming policy meeting.
Himino suggested that the central bank might consider raising rates, citing sustained wage growth and expectations of a clearer U.S. policy landscape following President-elect Donald Trump’s inaugural address later this month.
The yen’s pair edged 0.1% higher to 157.62 yen on Tuesday.
In recent months, the BOJ has been adjusting its monetary policy to address rising inflation. In March last year, it ended its negative interest rate policy, and by July, it had increased the short-term policy rate to 0.25%.
These measures aim to achieve a stable 2% inflation target, supported by robust wage growth and a weakening yen, which have contributed to higher import costs.
Despite these developments, the yen’s exchange rate against the U.S. dollar remained relatively stable, reflecting market skepticism about the likelihood of an imminent rate hike.
Analysts suggest that while the BOJ is signaling a shift towards policy normalization, uncertainties surrounding global economic conditions and domestic wage dynamics may lead to a cautious approach.
Barclays (LON:) expects the central bank to implement rate hikes in March and October, with a terminal rate of 0.75%.
The BOJ’s next policy meeting is scheduled for January 23-24, where new growth and price projections will be discussed.
Investing.com — UBS strategists expect the US dollar “to stay stronger for longer,” citing robust US economic activity and ongoing tariff concerns impacting other regions.
Monday saw the (DXY) soar to its highest level since November 2022, trading above the 110 mark during the session. This represents a roughly 9% appreciation since late September.
The US dollar’s recent strength has been bolstered by better-than-expected domestic data, including nonfarm payrolls and the services sector purchasing managers’ index. These positive indicators have led to a decrease in the anticipated number of Federal Reserve rate cuts this year, with the consequent rise in US yields lending broad support to the USD.
While US economic data is expected to remain solid in the near term, the outlook for Europe is less optimistic, with subdued growth prospects.
Although growth in China is forecasted to accelerate to 5% year-over-year for the fourth quarter, the threat of US tariffs poses a significant risk. Political and economic uncertainties in South Korea, the European Union, and the UK have been linked to weakness in their respective currencies.
According to UBS, potential monetary policy divergence is among the key factors that could further propel the dollar upward in the near term.
While the Fed is expected to cut rates by a total of 50 basis points in the second and third quarters, the European Central Bank is projected to reduce rates by 100 basis points in the first half of the year.
“Policy divergence is a powerful driver of currencies, which leads to trending FX markets and the potential for overshooting exchange rates,” strategists led by Mark Haefele wrote.
The firm also points out that tariff risks may not be fully accounted for in the current USD valuation. Despite the dollar’s recent rally being largely attributed to solid US macroeconomic data, the introduction of new tariffs could drive the dollar even higher.
UBS suggests that if tariffs are implemented, the DXY could trade between 110 and 115, with significant impacts on other major currency pairs.
“If tariffs were to materialize, DXY could trade in a 110-115 range, could drop below parity, could slide below 1.20, and could move toward 0.94, in our view,” strategists noted.
However, the investment bank believes that the story of 2025 could be a tale of two halves, with the dollar strength in the first half of the year potentially reversing in the second half.
The current trading position of the USD, which is considered strongly overvalued and shows the highest level of dollar net length since 2015, supports this view.
UBS’s revised forecasts for the EUR/USD pair reflect this expected trajectory. Strategists expect the pair to trade at 1.00 in March, 1.02 in June, and 1.06 in December 2025.
In the case of China, despite the possibility of dramatically higher effective tariff rates, the CNY has only partially priced in this risk, with UBS reiterating its forecast for the to reach 7.50 by June.
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