Risk-driven assets were set for a tough week following signs of sticky U.S. inflation, as well as slowing growth in China.
The Chinese yuan traded at two-month lows after disappointing trade and inflation data released this week pointed to a slowing economic rebound in Asia’s largest economy. The readings, which came in the wake of a surprise contraction in China’s manufacturing sector, drummed up expectations of more policy loosening by Beijing.
This put the yuan within spitting distance of the 7 level against the dollar, which is psychologically important for Chinese regulators and investors.
Weakness in the Chinese economy dulled sentiment towards broader Asian markets. The South Korean won fell 0.2%, while the Malaysian ringgit shed 0.3%, even as data showed that Malaysia’s economy grew more than expected in the first quarter.
The Japanese yen fell 0.1%, and was set for mild weekly gains as fears of a U.S. banking crisis and uncertainty over the debt ceiling made for some safe haven demand.
While a surprise jump in U.S. jobless claims pointed to some cooling in the labor market, sticky inflation readings for April pushed up expectations that the Federal Reserve will keep interest rates higher for longer this year.
Fed Fund futures prices also showed that markets were dialing down expectations for any interest rate cuts by the central bank this year.
Such a trend heralds more support for the dollar, and is likely to pressure Asian currencies as the gap between risky and low-risk debt remains narrow. Most Asian central banks have wound down their rate hike cycles this year, providing little support to regional currencies.
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