Asia FX retreats, Australian dollar down as RBA holds rates

By Ambar Warrick

Investing.com -- Asian currencies inched lower on Tuesday amid growing uncertainty over economic growth this year, while the Australian dollar retreated after the Reserve Bank held interest rates and signaled that inflation had likely peaked.

The Australian dollar lost 0.3% after the RBA held interest rates at 3.60% in a closely-watched decision. The bank said that it was waiting to observe the full effects of its year-long rate hike cycle on the economy, and that inflation had likely peaked after touching an over 30-year high in December.

While inflation eased for two consecutive months from a December peak, it was still well above the RBA’s 2% to 3% target range. To this end, the central bank warned that more rate increases could still be in order to bring down stubborn inflation.

Still, the prospect of rates remaining steady weighed on the Australian currency, as did a warning on economic growth from the RBA.

Broader Asian currencies crept lower, while the U.S. dollar nursed overnight losses after a raft of weak manufacturing data and a spike in oil prices ramped up uncertainty over economic growth this year.

The Chinese yuan fell 0.1% as data on Monday showed that a recovery in the country’s manufacturing sector was running out of steam on weakening global demand.

Weak manufacturing data from Japan also weighed on the yen, which fell 0.3% as manufacturing activity remained in contraction territory for five straight months.

The dollar index and dollar index futures were flat on Tuesday after falling in overnight trade, as softer-than-expected manufacturing activity data pointed to a middling outlook for the U.S. economy.

This saw markets reassess how much economic headroom the Federal Reserve will have to keep raising interest rates, even as a spike in oil prices pointed to higher fuel prices, which could in turn buoy inflation.

While the prospect of a less hawkish Fed is positive for Asian currencies, investors remained wary of risk-heavy assets amid growing economic uncertainty.

The Thai baht fell 0.2%, while the Indian rupee and South Korean won lost 0.1% and 0.4%, respectively. The won was also pressured by slightly softer-than-expected inflation data, which lends further credence to the Bank of Korea’s decision to halt interest rate hikes earlier this year.

Focus this week is now on U.S. nonfarm payrolls data, due Friday, for more cues on monetary policy. An Indian interest rate decision is also awaited, with the Reserve Bank expected to hike interest rates once again.