Forex
Asia FX weakens with yuan volatile, dollar steady ahead of PCE data
Investing.com– Most Asian currencies moved in a flat-to-low range on Friday with the Chinese yuan logging wild swings amid suspected intervention by the People’s Bank, while the dollar steadied ahead of key inflation data.
Weak risk appetite saw traders remain averse to most regional currencies this week, while the Japanese yen saw extended buying as it benefited from safe haven demand, while an unwinding carry trade also benefited the currency. The yen was by far the best performer among its Asian peers this week.
Commodity-linked currencies, particularly those with exposure to China, saw some relief on Friday, with the Australian and New Zealand dollars strengthening slightly. But the two were nursing steep losses this week.
Dollar steady after strong GDP; inflation, Fed in focus
The and both steadied on Friday after seeing some resilience on stronger-than-expected data for the second quarter.
The reading pushed up hopes that the U.S. economy was headed for a soft landing, where growth will remain steady while inflation eases.
Focus is now squarely on data- which is the Federal Reserve’s preferred inflation gauge. The reading is due later on Friday and is expected to show inflation eased further in June.
PCE data also comes just days before a , where the central bank is widely expected to keep rates unchanged. But any signals on interest rate cuts will be closely watched, with markets keeping intact expectations for a September cut.
Chinese yuan logs wild swings after suspected intervention
The Chinese yuan weakened on Friday, pulling back after suspected intervention by the Chinese government saw the currency appreciate sharply against the dollar on Thursday.
The pair had fallen sharply from near eight-month highs on Thursday, with its outsized drop sparking speculation over government intervention. The currency was grappling with increased selling pressure after a series of surprise interest rate cuts by the PBOC this week.
Doubts over a slowing economic recovery also weighed on the yuan.
Japanese yen outperforms, BOJ awaited
The Japanese yen was among the best performers this week, extending a strong run after suspected intervention by Tokyo earlier in July boosted the currency.
The pair was down 2.4% this week- its biggest weekly drop since late-April.
However, the yen’s advance was somewhat stalled by , which showed inflation remained largely muted in July.
The soft inflation reading came just days before a , with analysts split over whether the central bank will have enough headroom to hike interest rates by 10 basis points.
Broader Asian currencies were mostly nursing steep losses against the dollar this week, as risk appetite soured. The Australian dollar’s pair and the New Zealand dollar’s pair were both down nearly 2% this week.
The Indian rupee’s pair steadied after apparent Reserve Bank intervention pulled the pair away from record highs hit on Thursday.
The South Korean won’s pair rose 0.3%, while the Singapore dollar’s pair was flat after the Monetary Authority of Singapore kept monetary policy unchanged.
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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