Asia FX sinks, dollar hits five-week high as U.S. inflation rises

Investing.com -- Most Asian currencies sank on Monday, while the dollar rose to a five-week high as a stronger-than-expected U.S. inflation reading drove up fears that the Federal Reserve could keep raising interest rates.

Concerns over worsening economic conditions in China also kept sentiment towards Asian assets dim, especially amid reports of a looming default for one of the country’s largest real estate developers.

Dollar buoyed by stronger inflation

The dollar index and dollar index futures rose nearly 0.2% each in Asian trade, hitting their highest levels since early-July after strong consumer and producer inflation readings for July.

The higher readings pushed up concerns that the Fed will need to maintain its hawkish stance for longer than expected to bring down sticky price pressures.

The prospect of rising U.S. interest rates boosted the dollar and Treasury yields, and kept investors shy of high-risk Asian markets. With U.S. interest rates set to remain at over 20-year highs until at least early-2024, Asian currencies are unlikely to see any relief in the near-term.

The Japanese yen was among the worst hit by a stronger dollar, briefly hitting a near nine-month low to the greenback as the gap between U.S. and Japanese yields widened. The South Korean won shed 0.2%, while the Thai baht slid 0.4% in holiday-thinned trade.

Chinese yuan hits five-week low, more economic signals awaited

The yuan slipped 0.1% to a five-week low of 7.2434 to the dollar. While further losses in the currency were somewhat mitigated by a strong daily midpoint fix, the outlook for the Chinese currency appeared dour.

A string of weak economic readings released last week showed that an economic recovery likely slowed further at the beginning of the third quarter. This was capped off by data showing a substantial drop in new loans through July.

Focus is now on retail sales and industrial production data, due on Tuesday, for more economic cues.

But in addition to the weak readings, media reports suggested that Country Garden (HK:2007), one of the country’s biggest property developers, was facing a potential debt default - a scenario that bodes poorly for the real estate market, which was once China’s biggest economic engine.

Concerns over China saw the Australian dollar sink 0.5% and come within sight of a nine-month low. The Singapore dollar also sank 0.2%.

Indian rupee flat ahead of inflation cues

The Indian rupee moved little on Monday as investors awaited key wholesale and consumer inflation data for July, due later in the day.

The data comes just a few days after the Reserve Bank of India warned that inflation grew substantially in the past month, due to elevated food prices.

Any increases in inflation are likely to draw more hawkish measures from the RBI.