Asia FX Muted as Dollar Steadies; Kiwi Surges on Red-Hot Inflation

By Ambar Warrick

Investing.com-- Most Asian currencies moved little on Tuesday as the dollar steadied from overnight losses, while the New Zealand dollar surged after higher-than-expected inflation data pushed up expectations of more interest rate hikes.

The New Zealand dollar jumped 0.6% to the greenback after data showed the country’s inflation rate blew past expectations in the third quarter.

The reading reinforced expectations that the New Zealand central bank will keep hiking interest rates sharply to quell inflation, which is expected to boost the NZD.

New Zealand's central bank is one of the first major banks to begin tightening policy in the aftermath of the COVID-19 pandemic. But this has done little to quell local inflation, warranting more steep rate hikes.

The Australian dollar also rose slightly against the greenback after the minutes of the Reserve Bank’s latest meeting showed that despite raising rates by less than expected this month, the RBA intends to keep hiking rates to combat rising inflation.

The Chinese yuan fell marginally to the dollar, as traders weighed mixed economic signals from the country. While the government reiterated its commitment to maintain its controversial zero-COVID policy, it also outlined stimulus and spending measures to further support economic growth.

But sentiment towards China was dented by the U.S. government unveiling new restrictions on Chinese companies’ access to U.S.-made semiconductors. The move is expected to deal a severe blow to China’s chipmaking ambitions, which could dent economic growth in the coming months.

The Japanese yen rose 0.1% to the dollar, but traded near its worst level since 1990 as a growing rift between local and U.S. interest rates continued to weigh. Focus is now on intervention in currency markets by the Bank of Japan to support the yen, after the bank acted in late-September by selling dollars and buying yen.

The U.S. dollar rose slightly on Tuesday, recovering from a 1% drop on Monday as sentiment improved after the UK government made a dramatic reversal on a controversial tax policy. The pound strengthened sharply after the move, weighing on the dollar index.

The dollar index rose 0.2% on Tuesday from a 1-½ week low, while dollar index futures rose 0.1%, hovering around the 112 level.

But despite weakening slightly in recent sessions, the greenback is expected to gain in the coming months, especially as the Federal Reserve keeps hiking interest rates to combat rampant inflation.

Markets are currently pricing in a near 100% chance the bank will hike rates by 75 basis points in November, its third such consecutive hike. This trend has weighed heavily on Asian currencies this year, and is broadly expected to continue applying pressure.

Rising interest rates also pushed up fears of a potential U.S. recession, with Bloomberg economists now forecasting a 100% chance that the world’s largest economy will shrink in the next 12 months.