Asia FX slips, dollar creeps lower after Fitch rating cut

Investing.com -- Most Asian currencies fell on Wednesday after Fitch cut the U.S. government’s sovereign rating, although the dollar was little changed, retaining most of its recent gains on strong economic data.

Fitch trimmed the U.S.’ rating to AA+ from AAA, citing concerns over stretched fiscal spending in the coming years, as well as increased partisan risks to government policy. The agency had flagged a potential downgrade earlier this year.

Fitch downgrade seen having limited impact, dollar steady

The dollar fell slightly in Asian trade after the rating cut, but retained a bulk of its gains this week after economic data pointed to some resilience in the U.S. economy.

Analysts stated that while the Fitch rating cut is expected to trigger some near-term risk aversion, it would have little broader ramifications for financial markets.

“The downgrade mainly reflects governance and medium-term fiscal challenges, but does not reflect new fiscal information… should have little direct impact on financial markets,” Goldman Sachs analysts said in a note.

Signs of a manufacturing recovery, coupled with improved construction activity, pushed up bets that the U.S. economy will dodge a recession this year. Such a scenario gives the Federal Reserve enough headroom to keep raising interest rates.

The dollar index and dollar index futures both fell 0.1% in Asian trade, but were close to three-week highs.

Broader Asian currencies retreat

Losses in Asian currencies were relatively limited on Wednesday. Still, the risk-averse mood weighed on most regional units, with weak manufacturing activity prints from major economies also weighing on sentiment.

The Chinese yuan fell 0.1%, brushing off a stronger midpoint fix by the People’s Bank, with investors also souring on expected stimulus measures from the government. While officials promised more policy support for a struggling economic recovery, they did not provide any concrete cues on the planned measures.

The Japanese yen traded sideways after steep overnight losses, with focus remaining on the Bank of Japan’s bond buying operations, after the bank announced more flexibility in its yield curve control mechanism last week.

Emergency bond buying by the BOJ had battered the yen earlier this week.

The Australian dollar extended losses, sinking 0.3% after the Reserve Bank kept interest rates on hold this week, denting some expectations for a hike.

In Southeast Asia, the Thai baht fell 0.1% ahead of an interest rate decision from the central bank due later in the day. The Thai central bank is widely expected to hike interest rates by 25 basis points to combat high inflation.