- Aggressive Fed talk rattles Asia FX, dollar reaches 3-month high
After a warning from Federal Reserve Chair Jerome Powell that the central bank is likely to hike interest rates more than anticipated, most Asian currencies fell on Wednesday as the dollar rose to a three-month high.
Powell testified before Congress that the recent resilience of the American economy required the Fed to act more forcefully to reduce inflation. As a result, markets started pricing at a faster rate of Fed interest rate increases in the coming months.
After an overnight jump in Treasury yields, the dollar index and dollar index futures increased 0.2% to a three-month high on Wednesday. The United States 2-year yields reached 5% for the first time since 2007.
Demand for Asian currencies decreased with rising dollar strength and became more enticing as the difference between risky and low-risk returns closed. Through 2022, this trend significantly hurt regional currencies and was expected to pick up again soon.
The markets are anticipating additional hints about the US economy from the Fed’s Beige Book report, which is coming later today, and Friday’s nonfarm payroll data.
After conflicting trade data and predictions of a potential clash between the two largest economies in the world, persistent worries about China also played a role.
The Chinese yuan lost 0.2% of its value versus the dollar and was on the verge of crossing the crucial 7 level, which would have resulted in more losses for the currency.
The country recorded a record trade surplus in February, according to data released on Tuesday, but imports also decreased far more than anticipated, indicating sluggish demand in Asia’s largest economy.
Risk-heavy The Malaysian ringgit lost about 1.2% on the day, making Southeast Asian currencies the worst performers. Also losing 0.7% each were the Indonesian rupiah and the Philippine peso.
The fact that the Bank of Japan is anticipated to maintain its ultra-loose monetary policy on Friday shows the poor economic data this week, which caused the Japanese yen to decline by 0.5%. As reported on Thursday, reports confirm that the Asian economy shrank significantly in the fourth quarter of 2022 after Japan’s current account deficit widened more than expected in January.
There will probably be little motivation to adjust policy as a result of the impending change in leadership at the BOJ.
The Australian dollar increased 0.2% after suffering significant losses on Tuesday, while the Indian rupee slipped 0.2% in catch-up activity.
source:
