Asia FX dented by rising yields, dollar gains as Fed minutes loom

By Ambar Warrick

Investing.com -- Most Asian currencies retreated on Wednesday tracking strength in the dollar and an overnight spike in Treasury yields, as markets hunkered down ahead of more cues on monetary policy from the minutes of the Federal Reserve’s February meeting.

The dollar remained pinned near a six-week high against a basket of currencies, with the dollar index and dollar index futures trading sideways in Asian trade. But the greenback advanced in overnight trade.

U.S. Treasury yields also rose after a better-than-expected reading on U.S. business activity in February, which showed that the world’s largest economy was still running hot, giving the Fed more headroom to hike interest rates.

The Fed minutes, due later in the day, are widely expected to reiterate the central bank’s hawkish stance. But that stance now holds more ground after U.S. inflation surprised to the upside in January.

Asian currencies retreated on that notion, with the Chinese yuan losing 0.3% on Wednesday. The currency was also pressured by growing uncertainty over a Chinese economic recovery, given that economic indicators released so far have painted a mixed picture of Asia’s largest economy.

China’s central bank held its key mortgage rates at record lows this week, as it moves to facilitate an economic recovery. But the trend is also negative for the yuan, as a gap between local and international borrowing rates widens.

The Japanese yen rose 0.1%, but was nursing steep losses for the week amid uncertainty over an upcoming address by Bank of Japan Governor nominee Kazuo Ueda. Ueda is expected to shed more light on the central bank’s plans for its ultra-loose policy this year.

BOJ board member Naoki Tamura said on Wednesday that an end to the ultra-loose policy will largely depend on inflation and economic growth this year.

The New Zealand dollar reversed early gains and fell 0.3%, even as the Reserve Bank of New Zealand hiked rates by 50 basis points and flagged more increases. But the central bank also flagged a sharp slowdown in economic growth this year, due to the impact of higher interest rates and rising inflation.

The Thai baht fell the most among Southeast Asian currencies, losing 0.3%, while the Australian dollar fell 0.3% as data showed local wages grew less than expected in the fourth quarter.

Focus this week is also on U.S. Personal Consumption Expenditures data, which is the Fed’s preferred inflation gauge. The reading, due on Thursday, is expected to reiterate that inflation remained sticky in January.