Most Asian currencies edged lower on Wednesday as expectations of a slower pace of U.S. interest rate cuts lent strength to the dollar, while the Japanese yen remained steady following warnings of potential intervention from government officials.
Regional markets were also weighed down by escalating trade tensions between the U.S. and China. This followed Washington’s decision to blacklist two major Chinese companies over alleged ties to the Chinese military. The move comes shortly before President-elect Donald Trump’s inauguration on January 20, with Trump having pledged to impose steep trade tariffs on China. The Chinese yuan’s USD/CNY pair stabilized after hitting its weakest level in 17 years earlier this week.
Elsewhere, the South Korean won’s USD/KRW pair inched up 0.1% amid ongoing political uncertainty in the country. Similarly, the Singapore dollar’s USD/SGD pair rose by 0.1%, while the Indian rupee’s USD/INR pair steadied at 85.8 rupees after reaching record highs above 86 rupees last week.
Dollar Gains on Strong Economic Data
The dollar index and dollar index futures stabilized during Asian trading hours on Wednesday, following a sharp rise overnight. The greenback’s strength was driven by better-than-expected job openings data for November, signaling resilience in the labor market. This comes ahead of key nonfarm payrolls data for December, which is expected to provide further insight into the labor market’s performance.
Additionally, robust purchasing managers index (PMI) data fueled expectations that inflation may remain stubbornly high in the coming months. This has reinforced market bets that the Federal Reserve will adopt a more gradual approach to cutting interest rates.The central bank cautioned that it will significantly slow the pace of rate cuts in 2025, citing persistent inflation and a robust labor market as key concerns.
Higher U.S. Rates Pose Challenges for Asian Markets
Prolonged elevated U.S. interest rates are expected to weigh on Asian markets by reducing the rate differential that typically attracts investors to regional assets.
Japanese Yen Stabilizes Amid Intervention Speculation
The Japanese yen’s USD/JPY pair traded in the low 158s on Wednesday, recovering slightly from its weakest level in nearly six months. The yen’s recent losses were curtailed after government officials issued verbal warnings about potential currency market intervention, prompting traders to exercise caution in shorting the currency.
The yen has been under pressure due to expectations of higher U.S. interest rates and the Bank of Japan’s dovish stance. This dynamic pushed the USD/JPY pair close to levels that previously triggered government intervention, with traders now eyeing the 160 yen level as a potential threshold for action.
Australian Dollar Holds Steady Amid Mixed Inflation Data
The Australian dollar’s AUD/USD pair erased early losses to trade flat as markets processed mixed inflation data. Headline inflation for November came in higher than expected, while core inflation showed a slight decline.
The data offered mixed signals on the timeline for potential interest rate cuts by the Reserve Bank of Australia. Although core inflation remains above the RBA’s target range of 2% to 3%, analysts largely anticipate rate cuts to begin in the second quarter. However, Wednesday’s data has spurred some speculation of an earlier policy shift.
