Asia FX rises, dollar hits 15-month low on weak inflation

Investing.com -- Most Asian currencies strengthened on Thursday, while the dollar languished at 15-month lows after weaker-than-expected U.S. inflation data spurred bets that the Federal Reserve was close to hitting peak interest rates.

U.S. Treasury yields also dropped after the weak inflation reading, as the data, coupled with signs of a cooling labor market, spurred bets that the Fed will likely taper its hawkish stance in the coming months.

The dollar fell sharply in overnight trade, with the dollar index and dollar index futures losing about 0.1% each in the Asian session. Both indicators were trading at a 15-month low, after tumbling 1.2% in the prior session - their worst day so far in 2023.

Weakness in the dollar saw most Asian currencies rally late on Wednesday, with regional units steadying in morning trade on Thursday. Asian currencies were battered by a sharp increase in U.S. interest rates over the past year, and have rebounded sharply on the prospect of an end to the Fed’s rate hike cycle.

The Japanese yen, one of the worst performers in Asia so far this year, traded close to a two-month high against the greenback, while the rate-sensitive South Korean won rose 0.1% after the Bank of Korea kept interest rates steady for a fourth consecutive month. Both currencies rallied over 1% each in overnight trade.

Gains in commodity prices saw the Australian dollar jump 0.4%.

Chinese yuan lags after dismal trade data

China’s yuan was among the few outliers in Asian currencies for the day, trading flat after overnight gains as data showed the country’s trading conditions worsened further in June.

Both exports and imports shrank substantially more than expected through the month, while the country’s trade surplus missed expectations. The reading, which follows weak inflation and business activity data for June, further highlighted a slowing economic recovery in the country, even after it lifted anti-COVID restrictions earlier this year.

While easing fears of the Fed helped the yuan recover sharply from six-month lows hit earlier this month, the currency still faces more headwinds from worsening sentiment towards China. More stimulus measures from Beijing are also expected to further undermine the currency.

U.S. CPI weakens, but July hike still on tap

While June’s consumer price index (CPI) inflation reading pointed to easing overall inflation in the country, core CPI, which ignores volatile food and fuel prices, still remained relatively sticky.

This saw investors pricing in an at least 25 basis point rate hike by the Fed in a late-July meeting, with several Fed officials also warning that rates will need to rise further in order to curb sticky inflation.

But analysts said that the central bank was still close to reaching peak rates in this hiking cycle, and that an extended pause in more hikes was likely in the coming months.