Forex
Asia FX weakens with dollar near 2-year peak ahead of payrolls data
Investing.com– Most Asian currencies weakened on Friday, while the dollar sat near its strongest level in over two years as traders braced for a potentially strong nonfarm payrolls reading due later in the day.
Regional sentiment was also undermined by weak inflation data from China, while traders speculated over a potential interest rate hike by the Bank of Japan, although this provided only fleeting support to the yen.
The dollar moved little in overnight trade on account of a U.S. market holiday. But the greenback remained upbeat following hawkish signals from the Federal Reserve earlier this week.
Dollar steady near 2-yr high as nonfarm payrolls loom
The index and both firmed slightly in Asian trade, and were just below their strongest levels since November 2022.
Focus was squarely on data for December, due later on Friday, for more cues on the U.S. economy and interest rates.
The greenback was buoyed by the minutes of the Fed’s December meeting, released on Wednesday, which reiterated the central bank’s warning that rates will fall at a slower pace this year.
The minutes also showed policymakers concerned over expansionary and protectionist policies under President-elect Donald Trump, which could underpin inflation in the long term.
Japanese yen weakens despite strong spending data
The Japanese yen reversed Thursday’s gains and softened on Friday, with the pair rising 0.2% and remaining above the 158 yen level.
Stronger-than-expected data released on Friday sparked increased speculation over a January interest rate hike by the Bank of Japan, especially as data released on Thursday showed a bigger-than-expected increase in .
Analysts expect a virtuous cycle of high wages, steady inflation and improving private consumption to spur more rate hikes by the BOJ in the coming months, potentially as soon as the BOJ’s late-January meeting.
But the yen saw fleeting support on this notion, as it came under pressure from the prospect of higher for longer U.S. interest rates.
Broader Asian currencies weakened on Friday on a similar notion, with traders turning especially averse towards the region before the nonfarm payrolls reading.
The Chinese yuan’s pair rose 0.3%, with the currency seeing continued weakness after soft inflation data for December. The prospect of trade tariffs under Trump also soured sentiment towards China.
The Australian dollar’s pair fell 0.2% and was close to a two-year low, as mixed inflation data released earlier in the week fueled bets on earlier interest rate cuts by the Reserve Bank.
The South Korean won’s pair rose 0.4% amid continued political strife in the country, while the Singapore dollar’s pair rose 0.1%.
The Indian rupee’s pair steadied below the 86 rupee level.
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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