Forex
Asia FX rises, dollar hits 15-month low on weak inflation
© Reuters
Investing.com — Most Asian currencies strengthened on Thursday, while the dollar languished at 15-month lows after weaker-than-expected U.S. inflation data spurred bets that the Federal Reserve was close to hitting peak interest rates.
U.S. also dropped after the weak inflation reading, as the data, coupled with signs of a cooling labor market, spurred bets that the Fed will likely taper its hawkish stance in the coming months.
The dollar fell sharply in overnight trade, with the and losing about 0.1% each in the Asian session. Both indicators were trading at a 15-month low, after tumbling 1.2% in the prior session – their worst day so far in 2023.
Weakness in the dollar saw most Asian currencies rally late on Wednesday, with regional units steadying in morning trade on Thursday. Asian currencies were battered by a sharp increase in U.S. interest rates over the past year, and have rebounded sharply on the prospect of an end to the Fed’s rate hike cycle.
The , one of the worst performers in Asia so far this year, traded close to a two-month high against the greenback, while the rate-sensitive rose 0.1% after the kept interest rates steady for a fourth consecutive month. Both currencies rallied over 1% each in overnight trade.
Gains in commodity prices saw the jump 0.4%.
Chinese yuan lags after dismal trade data
was among the few outliers in Asian currencies for the day, trading flat after overnight gains as data showed the country’s trading conditions worsened further in June.
Both and shrank substantially more than expected through the month, while the country’s missed expectations. The reading, which follows and for June, further highlighted a slowing economic recovery in the country, even after it lifted anti-COVID restrictions earlier this year.
While easing fears of the Fed helped the yuan recover sharply from six-month lows hit earlier this month, the currency still faces more headwinds from worsening sentiment towards China. More stimulus measures from Beijing are also expected to further undermine the currency.
U.S. CPI weakens, but July hike still on tap
While June’s (CPI) inflation reading pointed to easing overall inflation in the country, , which ignores volatile food and fuel prices, still remained relatively sticky.
This saw investors pricing in an at least by the Fed in a late-July meeting, with several Fed officials also warning that rates will need to rise further in order to curb sticky inflation.
But analysts said that the central bank was still close to reaching peak rates in this hiking cycle, and that an extended pause in more hikes was likely in the coming months.
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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