The dollar weakened further in Asian trade after steep losses on Tuesday, as data showed U.S. consumer inflation eased as expected in May. This fueled increased bets on a Fed pause, and also boosted appetite for risk-driven assets, which weighed on the dollar.
But further gains in regional currencies were limited, as markets still fretted over any hawkish surprises from the Fed.
The Australian dollar added 0.1%, while the Indian rupee was flat ahead of wholesale inflation data due later in the day. Data released earlier in the week showed a bigger-than-expected drop in consumer inflation.
Expectations of a Fed pause helped the Chinese yuan recover slightly from six-month lows.
But the currency remained under pressure from growing expectations for more rate cuts in China, after the People’s Bank of China (PBOC) trimmed a short-term lending rate on Tuesday.
The move comes as the Chinese government struggles to shore up a slowing economic rebound, amid weak manufacturing activity and persistent deflation.
Markets are now pricing in potential cuts in the PBOC’s Medium-term lending rate, and its benchmark Loan Prime rate (LPR) later in June.
More rate cuts bode poorly for the yuan as the gap between local and international interest rates widen, with the LPR already in record-low territory. A string of weak daily midpoint fixes by the PBOC also pressured the Chinese currency.
China’s first rate cut in 10 months brewed renewed concerns over an economic recovery in the country, which appears to have run out of steam after a strong first quarter.
While a bulk of traders expect the Fed to keep rates on hold later in the day, markets remained wary of any hawkish surprises, given that U.S. inflation was still trending well above the central bank’s target range.
Even if the Fed pauses, U.S. rates are expected to remain higher for longer, limiting any major upside for Asian currencies.
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