Forex
Asia FX flat, dollar muted with inflation, economic cues on tap
Investing.com– Most Asian currencies moved little on Tuesday as the dollar tread water in anticipation of key inflation data due later in the day, while the Japanese yen weakened further ahead of more cues on the economy.
Sentiment towards regional currencies remained constrained after a large risk-off move across markets last week, while an unwinding carry trade with the yen also weighed.
Uncertainty ahead of more economic signals from China also weighed, amid persistent concerns over a slowdown in the region’s biggest economy.
Dollar steadies with CPI data on tap
The and moved little in Asian trade, extending a sluggish overnight performance as anticipation of the inflation data deterred big bets.
data, due on Wednesday, is expected to show inflation cooled slightly in July- a scenario that gives the Federal Reserve more headroom to begin cutting interest rates.
Lower rates bode poorly for the dollar. A softer inflation reading could also spark renewed concerns over a U.S. recession, inviting even deeper interest rate cuts from the Fed.
Traders are split over a 25 or 50 basis point cut by the Fed in September, with July’s inflation reading likely to factor into the decision.
Beyond the inflation data, and data is also on tap this week.
Japanese yen weakens further, GDP data awaited
Weakness in the Japanese yen persisted following some less hawkish statements from the Bank of Japan last week, with the pair rising 0.2% to 147.48 yen.
The pair had fallen as low as 141 yen last week amid increased safe haven demand and an unwinding carry trade. But traders questioned just how much scope there was for the BOJ to hike interest rates further this year.
data showed Japan’s factory inflation grew as expected in July.
Second-quarter data, which is due on Thursday, is set to factor into the outlook for Japanese rates. Any signs of resilience in the economy, especially amid stronger wages, gives the BOJ more impetus to hike rates- a scenario that bodes well for the yen.
Broader Asian currencies were muted. The Chinese yuan weakened slightly, with the pair rising 0.1%, with and data due later this week.
The Australian dollar was among the few outliers, with the pair strengthening 0.2%. Westpac data showed improved slightly in August.
The South Korean won’s pair rose 0.1%, while the Singapore dollar’s pair fell slightly.
The Indian rupee’s pair remained close to record highs, after on Monday showed a sharp decrease in inflation through July.
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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