Forex
Asia FX muted as dollar holds weekly gains; yen steady with election in focus
Investing.com– Most Asian currencies weakened slightly on Friday as the dollar retained a bulk of its weekly gains on expectations of a slower pace of interest rate cuts by the Federal Reserve.
The Japanese yen steadied near its weakest level in three months as Japan geared up for a tightly contested general election over the weekend, while verbal warnings on potential currency market intervention also kept traders skittish towards the currency.
Most Asian currencies were nursing losses this week as a mix of factors dented risk aversion, although the yen- traditionally a safe haven- was the worst performer this week.
USDJPY steadies near 152 with election, intervention in focus
The yen’s pair steadied near thee-month highs around 152 yen, and was headed for a 1.6% gain this week- its fourth consecutive week of gains.
Sentiment towards Japanese markets was largely on edge before a general election on Sunday, where local polls showed an alliance led by the ruling Liberal Democratic Party could struggle to reach a majority.
This could lead to Prime Minister Shigeru Ishiba facing an uphill battle to enact more economic reforms, while increased political uncertainty is also expected to undermine expectations for more interest rate hikes from the Bank of Japan.
Consumer inflation data from Tokyo showed inflation eased slightly less than expected in October, but fell below the BOJ’s 2% annual target. The data usually heralds a similar reading from nationwide inflation data.
The yen saw some strength after government officials kept up their warnings of potential intervention in the currency market, given recent weakness in the yen.
Dollar set for fourth week of gains
The and steadied in Asian trade, and were headed for a fourth straight week of gains. The greenback was trading up about 0.6% this week.
In addition to bets on smaller rate cuts, the dollar was also buoyed by increasing bets that Donald Trump will win the 2024 presidential elections. Recent polls and online prediction markets put Trump ahead of Democratic nominee Kamala Harris.
Trump’s policies are expected to be inflationary, presenting a higher outlook for U.S. rates in the long term.
Concerns over stickier U.S. interest rates sparked weakness in Asian markets, with most regional currencies headed for weekly declines.
The Chinese yuan’s pair rose 0.1% on Friday and was set to rise 0.3%. A meeting of China’s National People’s Congress, initially slated to take place in late-October, now appeared to be delayed to November.
The Australian dollar’s {{|AUDUSD}} pair fell 0.3% on Friday, while the South Korean won’s pair surged 0.7%.
The Singapore dollar’s pair rose 0.2%, while the Indian rupee’s pair hovered close to record highs.
Investing.com – The US dollar has gained strongly since the US presidential election in November, but these gains are unlikely to limit the hit that US customers are likely to face from tariffs, according to UBS.
At 08:25 ET (13:25 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% lower to 108.950, but was around 1.5% higher over the last month, and remained not far from the more than two-year high seen last week.
The theory is that a stronger dollar lowers US import prices, said analysts at UBS, in a note dated Jan. 17. Those lower prices would partially offset the tax payments US consumers must make to the US Treasury when buying imports.
If the US paid for the Chinese imports, then a stronger dollar would automatically reduce the amount of dollars paid (fewer dollars are exchanged to pay the renminbi price). However, the US pays for practically all its imports in dollars, so this does not happen.
If the dollar strengthens, the dollar price is unchanged, unless the exporter consciously chooses to lower the dollar price of the goods sold, UBS added.
An exporter to the US might deliberately lower dollar prices, as (in dollar terms) local currency costs are lower. But local currency costs are only a fraction of a manufacturer’s costs.
“A Chinese electronics manufacturer, importing chips (bought in dollars) and exporting computers to the US (in dollars), will probably keep their dollar prices stable—ignoring currency moves,” UBS added.
The US dollar strengthened against China’s renminbi in 2016 and 2018/19, and US import price inflation for products from China showed no noticeable break with earlier trends.
The preference seems to have been to reroute supply chains as a way of avoiding trade taxes.
Investing.com – The US dollar slumped Monday following a report that indicated that President-elect Donald Trump was set to delay imposing trade tariffs immediately upon his inauguration, an expectation which had boosted the US currency following his November election victory.
At 09:20 ET (14:20 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 1.1% lower to 108.020, having climbed to a more than two-year high last week.
The Wall Street Journal reported Monday that Trump is planning to issue a broad memorandum on his inauguration that directs federal agencies to study trade policies and evaluate US trade relationships with China and America’s continental neighbors—but stops short of imposing new tariffs on his first day in office.
The memo, which the WSJ has seen, suggests that debates are still ongoing within the incoming administration over how to deliver on Trump’s campaign trail promises for hefty tariffs on imports from trade rivals such as China.
The dollar has gained around 4% since the November presidential election as traders anticipated Trump’s policies will be inflationary, necessitating higher interest rates for a longer period.
“Financial markets are on tenterhooks to see what executive orders newly elected US President Donald Trump will enact on his first day,” said analysts at ING, in a note.
“FX markets are most interested in what he has to say about tariffs and what kind of pain the Oval Office plans to inflict on major trade partners.”
Bank of America (BofA) noted a significant increase in repo rates during the week of January 13 due to heightened liquidity demand triggered by tax payments and limited funding provided by the People’s Bank of China (PBoC).
The liquidity squeeze was most noticeable on January 16, the day following the tax payment deadline, with DR007 and R007 reaching 2.34% and 4.19%, respectively.
The PBoC maintained its stance on defending the exchange rate stability, resulting in the tightness of (RMB) liquidity being felt in the offshore market as well.
On January 9, the central bank announced it would issue RMB60 billion of 6-month bills in Hong Kong, a significant increase compared to previous issuances. The coupon rate of 3.4% was notably higher than the December issuance, reflecting the tightness of CNH liquidity and subdued demand from investors.
The December FX settlement balance by banks’ clients fell further to a deficit of US$10.5 billion, the first deficit reading since July 2024. A key change from the previous month was a sharp increase in USD demand for service trade. Reports also suggest that domestic importers have been actively purchasing USD via FX forward to hedge against tariffs risk in recent weeks, which has been exerting upward pressure on forward points.
On January 13, the PBoC increased the cross-border macroprudential parameter to 1.75 from 1.50. This move allows domestic corporations and Financial Institutions (FIs) to conduct more cross-border borrowing.
Given the widened interest rate gap between China and overseas, BofA believes this is more of a symbolic move by the PBoC to anchor market’s expectation on FX.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.
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