Asia FX muted, dollar drifts lower despite CPI surprise

Investing.com-- Most Asian currencies kept to a tight range on Thursday, while the dollar edged lower as markets weighed stronger-than-expected inflation data against expectations that the Federal Reserve will keep rates unchanged next week. 

Data on Wednesday showed that U.S. consumer inflation grew slightly more than expected in August, amid rising fuel costs and steady consumer spending. 

But the reading was still insufficient in convincing markets that the Fed will hike rates next week, with general consensus remaining for a pause.

The dollar strengthened slightly after the data, while Treasury yields settled lower in overnight trade. This presented some pressure on Asian markets, although not to the extent that traders had feared in the wake of a strong inflation reading. 

Still, more U.S. economic cues remained on tap, with retail sales and producer inflation data due later in the day. 

The dollar index and dollar index futures fell 0.1% each in Asian trade. Strength in the euro, before a European Central Bank meeting later in the day, also weighed on the greenback.

In Asia, the Chinese yuan fell 0.1%, but remained well above a recent 10-month low as the People’s Bank of China (PBOC) buoyed the currency with a series of strong daily midpoint fixes.

Chinese industrial production and retail sales data is due on Friday, and is expected to offer more cues on a recovery in Asia's largest economy.

The Singapore dollar rose 0.1% as data showed unemployment remained steady in the second quarter.

The South Korean won added 0.3%, while the Indian rupee rose slightly before wholesale inflation data due later in the day.

The Japanese yen rose 0.2%, hovering just above a 10-month low as markets awaited more signals from the Bank of Japan on when it plans to pivot away from a negative rate regime. 

But a swathe of weak economic indicators from the country- lukewarm producer inflation and declining core machinery orders, fed expectations that the BOJ will keep rates lower for longer. 

The Australian dollar rose 0.2%, buoyed by stronger-than-expected labor data which fueled some expectations of more interest rate hikes by the Reserve Bank. 

The outlook for most Asian currencies still remained dour, given that the Fed is expected to keep interest rates higher for longer. Rising U.S. rates had battered regional currencies through the past year, and are likely to limit any major recovery in the region.