Asia FX weakens before Powell, Aussie slides on CPI miss

Asia FX weakens before Powell, Aussie slides on CPI miss

The U.S. dollar rose slightly in Asian trade, with the dollar index and dollar index futures adding 0.1% each after logging overnight losses. Stronger-than-expected U.S. economic data pushed up some appetite for risk-driven assets, weighing on the dollar’s safe haven appeal.

But improving risk appetite offered little support to Asian currencies, given that markets are still pricing in at least two more rate hikes by the Federal Reserve this year. Anticipation of an address by Fed Chair Jerome Powell, at a European Central Bank forum later in the day, also kept sentiment subdued.

The rate-sensitive South Korean won sank 0.5%, while the Japanese yen steadied at a near seven-month low of 143.94 to the dollar.

Markets were also watching for any potential intervention by the Japanese government to support the yen, following verbal warnings from several ministers on recent weakness in the currency. Analysts expect the government to step in after the yen crosses 145.

China’s yuan shed 0.1%, trading near a six-month low after data pointed to a sustained decline in the country’s industrial profits. Focus this week is also on purchasing managers’ index data from China, due on Friday.

The Australian dollar was the worst performer in Asia on Wednesday, losing 0.6% after data showed that consumer price index inflation grew less than expected in May.

The reading eases some pressure on the Reserve Bank to keep hiking rates, after the RBA shocked markets with two back-to-back hikes through May and June. Analysts now see a limited scope for another hike when the RBA meets next week.

But while overall CPI inflation eased in May, core inflation – which disregards volatile fuel and fresh food prices – still remained high.

The Australian economy is also expected to cool in the coming days, as it grapples with high inflation levels.

Powell is expected to offer up more cues on monetary policy at the ECB forum later in the day. The Fed chair had largely retained his hawkish stance during a two-day testimony before Congress last week, forecasting at least two more rate hikes by the Fed this year.

Markets are now pricing in an over 75% chance the Fed will raise rates by 25 basis points in July – a scenario that bodes poorly for Asian currencies.

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