- Dollar declines ahead of Powell as U.S.-China tensions are subdued in Asia FX
On Tuesday, Asian currencies traded in a narrow range due to worries over escalating U.S.-China tensions, and the dollar fell on speculation that Federal Reserve Chair Jerome Powell will sound less hawkish at a speech later in the day.
Foreign Minister Qin Gang issued a warning that a dispute with the US could worsen if the latter does not temper its language toward China, which caused the Chinese yuan to decline by 0.1%.
His remarks shook people’s perceptions of China, partly negating figures that showed the nation had a record trade surplus in February. Yet, a larger-than-anticipated drop in Chinese imports and a mediocre GDP estimate for 2023 have increased worries about a country’s economy recovering slowly.
Broader The Japanese yen fell 0.1%, while Asian currencies maintained a narrow range. There was less pressure on the Bank of Japan to tighten its ultra-loose policies after data revealed that salary growth in Japan slowed significantly in January.
Even as the Reserve Bank increased interest rates and announced that it would tighten policy further to fight inflation, the Australian dollar declined by 0.2%.
Additionally, the bank noted that Australian inflation had likely reached its peak, which suggests that the bank’s cycle of rate increases will eventually slow down.
The Thai baht was restrained as inflation came in lower than anticipated for February, while the Indonesian rupiah led losses in Southeast Asia with a 0.4% decline.
As a result of a lower-than-anticipated inflation report, the Philippine peso also experienced sideways trading.
The dollar lost ground overnight versus a basket of currencies as some wagers were placed that Powell, the Fed’s chairman, would adopt a less hawkish tone during his two-day appearance before Congress, which starts later on Tuesday.
Both the dollar index and the dollar index futures saw declines of 0.1%, still suffering from the previous week’s significant losses. Even still, the yield curve continued to invert. Overnight, U.S. Treasury yields also decreased.
Given the strength of the labor market and the persistence of inflation, Powell will provide more guidance on monetary policy in the upcoming months.
Yet, the burden of rising inflation and interest rates was also believed to be slowing down U.S. economic activity, with manufacturing activity declining even further in February.
Asian currencies will suffer from rising U.S. rates as the difference between high-risk and low-risk loans gets smaller. Asian markets have suffered from the pattern through 2022.
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