Asia FX flat as markets weigh Fed outlook, dollar near 3-mth high

Investing.com -- Most Asian currencies moved little on Monday as markets weighed hawkish yet somewhat reiterative comments on monetary policy from the Federal Reserve, while the dollar retained recent gains and came close to a three-month high.

Fed Chair Jerome Powell on Friday warned that U.S. interest rates could still rise further to curb sticky inflation, reiterating a similar warning he had offered during the Fed’s last meeting. 

His comments saw the dollar appreciate sharply against a basket of currencies, while U.S. Treasury yields also shot up. Most Asian units had retreated after his comments, and were nursing steep losses for the prior week.

The dollar steadied in Asian trade, with the dollar index and dollar index futures both stocking close to their strongest levels since early-June. 

Powell also reiterated the bank’s “higher for longer” stance on interest rates, indicating continued support for the greenback. 

Asia FX treads water, China optimism offers little support 

Most Asian currencies were muted on Monday. The Japanese yen fell 0.1%, while the Singapore dollar and and South Korean won moved little in either direction.

The prospect of higher-for-longer U.S. rates bodes poorly for Asian currencies, as the gap between risky and low-risk yields narrows. This trend has battered Asian markets over the past year, and is expected to limit any major recovery in the space. 

The Chinese yuan rose 0.1%, as sentiment towards the country improved after the government announced new measures to boost its stock markets. 

China also loosened some mortgage measures for its ailing property sector, although analysts still questioned whether the measures would help spur an economic recovery in the country.

But despite worsening sentiment towards China, the yuan has remained somewhat steady thanks to currency market intervention by the People’s Bank and the government.

Focus this week is also on key Chinese purchasing managers' index data, as well as U.S. nonfarm payrolls and PCE inflation.

Australian dollar outperforms on strong retail sales data 

The Australian dollar was the sole outlier among its peers on Monday, rising 0.5% after data showed that retail sales rebounded more than expected in July.

Resilience in consumer spending points to more upward pressure for inflation, which could potentially attract more rate hikes from the Reserve Bank, as it moves to curb sticky inflation.

While the RBA has held rates steady for the past three months, it has still kept the door open for more potential raises, given that inflation still remains well above the central bank’s target range.