Asia FX dips as dollar firms, yields spike on easing bank fears

By Ambar Warrick

Investing.com -- Asian currencies retreated on Wednesday as easing fears of a banking crisis spurred a sharp bounce in Treasury yields, rekindling some bets that the Federal Reserve still has room to keep raising interest rates.

The dollar also regained some ground against a basket of currencies in Asian trade, but was still trending close to 2023 lows. The dollar index and dollar index futures rose about 0.2%

The Japanese yen saw the sharpest pullback among Asian currencies, down 0.6% as waning safe haven demand also hit the yen’s appeal. The Bank of Japan’s Core Consumer Price Index, which is the central bank’s preferred inflation gauge, fell more than expected in March.

This tied into other signals that inflation has likely peaked in the country, giving the BOJ more space to maintain its ultra-loose policy, which is expected to weigh on the yen in the near-term.

The Chinese yuan fell 0.2%, inching back towards the 7 level against the dollar amid growing concerns over the scale of a Chinese economic rebound this year. While business activity recovered sharply over the past two months, a reading on Friday is expected to show some cooling in March as a post-COVID recovery runs out of steam.

China’s massive export sector is also facing increased headwinds from dwindling global demand.

Broader Asian currencies weakened after the Federal Reserve's head of banking supervision, Michael Barr, testified before Congress that the U.S. banking system was resilient, and that the recent collapse of several banks, chiefly Silicon Valley, was due to poor risk management.

The Thai baht and Taiwan dollar fell 0.3% each, while the South Korean won shed 0.2%.

The Australian dollar fell 0.2% after softer-than-expected inflation data for February lent more credence to the Reserve Bank’s considerations over pausing its interest rate hikes.

Barr’s comments spurred some bets that the Fed still has enough headroom to raise interest rates and fight inflation - which the Fed reiterated during its March meeting.

U.S. Treasury yields surged in overnight trade on this notion. But yields still remained well below highs hit earlier this year, given that the Fed also recently signaled that it was close to reaching terminal rates, which heralds an eventual pause in its rate hikes.

Fears of a U.S. banking crisis had decimated the dollar in March, amid increasing bets that the Fed will have little room to tighten policy further.